What a Week: Scary Headlines, Wild Market Swings

The stock market got off to a rough start Friday as Asian markets had a relatively tepid response to Thursday's Dow reversal and October retail sales produced the worst drop on record.

Meanwhile, traders continue to debate whether Thursday's snapback marked a successful "retest" of the October low.

In the accompanying video, Henry and I debate whether the whole "retest" concept holds up to scrutiny. He's a skeptic while I'm a believer in technical analysis, if only because so many traders watch these indicators they can become self-fulfilling, as discussed here.

Furthermore, a recent study by Merrill Lynch's David Rosenberg showed the following:

• Every market trough since 1932 was accompanied by a successful "retest."
• The average bounce from the initial low produced a gain of 16% in 35 days.
• The average bottoming phase — "trough to interim-high and then to the retest of the low," typically lasts 70 days, Rosenberg determined.

Of course, Rosenberg only focused on market troughs, which means there's probably 100s of other occasions when "retests" fail, and the market makes a lower low.

Beyond the technical mubo-jumbo, the bigger issue is what the market action says about the state of investor psychology, which is also difficult to quantify (and can be measured many different ways).

Clearly there's a lot of fear among individual investors, judging by mutual fund data, and market bottoms tend to occur when headlines are the scariest, as they have been this week. In addition to dismal retail sales data, Friday alone brought news of big layoffs at Sun Microsystems and Citigroup, and a huge earnings drop at J.C. Penney.

But the eagerness of "everybody" to be a contrarian bull suggests sentiment isn't really so negative after all, meaning this week's retest will likely ultimately get moved out of Rosenberg's study group and into the "failed" category.