Current Technical Conundrum as Displayed in Chart of BHP Billiton (BHP)

I thought it would be helpful to show the conundrum facing those who have a long history in the market, from a technical point of view - using an individual stock rather than the index.  However, let's be clear that the S&P 500 chart is not much different than this stock - BHP Billiton (BHP) or quite a few others.

As we wrote in the weekly summary, last week, and many times in 2009 - we have very strange V shaped bounces happening in repeated fashion, in places that make little sense. Seeing 1 of them a year, or every 18 months is normal, but we enjoyed V shaped bounces off quick selloffs, month after month after month.  Using technical analysis has had you either out of the market (or individual stocks) or shorting at exactly the wrong time.  I want to repeat the message I posted last week from one of my favorite "short term oriented" traders who puts it more eloquently than I do.

With the breakdown we've had over the last few days, you really have to be watching for a failed bounce that sets up shorts. Typically, the folks who are caught with too much inventory will be looking to cut back into a bounce, and that leads to another pullback. The problem is that last year it just didn't happen that way. Once we started to bounce, we just went straight back up without a pause. There were very few failed bounces, and that just killed the shorts.

Hence, those who used precedent and prudence were demolished in 2009 while those who play "balls to the wall" (excuse my french) ;) or frankly had little experience in markets and only know to "buy the dips", were having a field day.  I won't get into my (and others) theories on why we have seen such atypical relentless bounces (much of which occurred overnight rather than during normal market hours)  - if you've been reading for a month or two you know what grassy knoll we're speaking from.
 
The greater question is, what market are we in?  A repeat of 2009's atypical action?  Or something more like the historical precedent people who have experience in the market are used to?  I have no clue... but let's use BHP Billiton (BHP) as an example of what I am seeing in many charts. 
 
We have a stock that was doing fine, minding its own business up through the beginning of last week.  Then the stock experienced a sharp sell off - puncturing multiple support lines including the key 50 day moving average.  The drop has been quick, so we should expect a cursory oversold bounce.  That is what we have today.

[click to enlarge]
 

 
Now what?
 
If 2010 is just 2009 redux, BHP will simply ignore the 50 day moving average... which should be providing resistance (old support = new resistance) and go onto its merry way back to the $80s.
 
If 2010 is like any year other than 2009 (and perhaps a few months in 2003) this oversold bounce should be a perfect opportunity to sell long exposure and / or short the stock as it moves into a resistance area.  From which it should begin a new leg down.

This is exactly the setup we have on the S&P 500... and the same questions arise there.  Making the S&P 500 so much more dangerous is so much of our moves now come overnight as the "urgent buyer" sweeps in on an illiquid market to get those futures rollicking whenever there is a threat of the market breaking down.  [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]  Which creates havoc in the charts.  If half your rally since March 2009 has been in overnight hours, what sort of market do you really have?

Anyhow - the textbook says to begin layering on shorts, as oversold bounces taken broken charts back to resistance.  In a fully free market - that's the very obvious thing to do... your gut says to do this.  However, the (not so) invisible hand scoffs at textbooks.  So our experience in this type of setup is moot and we're more like a blind mouse wondering what maze we've been dropped into.  When the market overwhelms the hand... it will get interesting; and make life much more easy as old rules will begin to have use again.