The following are the thoughts Don Worden, founder of TCNet/TeleChart, a great real time chatting/charting application.  It was written the evening after the market sell off. Don’s a great writer and always offers eloquent insights into the market action.

                                                          The Bravado Stage

"The market knows where it wants to go, but it needs an excuse to do it. When the excuse eventually develops, we call it a catalyst. A catalyst isn’t the reason for a significant market move. It is a helper and a detonator.
     This market hasn’t been acting right for around three months. There are a lot of areas for concern: housing, sub-prime loans, the CPI, Alan’s clarinet dirge warning of a possible recession, energy, geopolitical tensions ranging from nuclear proliferation to the insurgency in Iraq to al-Qaeda rejuvenating in Pakistan, etc. The unrealistic time elapsed since a significant correction has itself developed into a sword of Damocles hanging over investors.
     I believe the huge decline in the Chinese stock market was not the actual reason for today’s decline, but it proved to be the catalyst the market needed to detonate a significant correction based on other factors.
     At the moment we are in the "bravado stage." The market was under a spell of belief that a nice gradual uptrend that had prevailed for almost eight months would never end. Even many people who knew better intellectually and by experience could not shake the feeling that Wall Street had lucked into a new kind of immortality. That was the "ecstasy stage," characterized by paralysis of the front lobe of the brain.
     The eight-month Intermediate Uptrend has now turned negative for the Dow and SP-500. The Nasdaq Brothers are hanging on to an LA by their teeth. I could interpret Intermediate Downtrends for them, but I’ve decided to wait for a violation of the December lows. (Remember, the Trend Table is based on closing prices.)
     The belief in the unearthly rally still lingers. This is why at least fifty guests on CNBC today proclaimed this an isolated event, and that there was no reason to be concerned. Many are pointing to the fact that stocks are cheaper today than they were yesterday, with the distinct implication that this is a buying opportunity. It will take an unknown amount of time for the "bravado stage" to vanish. If tomorrow’s follow-through approaches the magnitude of today’s decline, the "bravado stage" may disappear right there.
     The point is, though, that the Intermediate Decline that has begun will persist at least until the bravado stage has floated away on a cloud.
     The next stage is the "panicky stage," when investors turn hostile and feel they have been swindled. Why is this happening to me? Why was there no warning? Following this is the "give-up stage," which investors react to in a variety of individual ways. Some will simply cease to be investors. Some will start dumping stock, enabling the decline to feed on itself. But most will take it in stride without much faith in the integrity of the market, and without much confidence that they will be able to pick the bottom or have the courage to try. Some will, though, and will thrive again.
     Actually, as Intermediate Declines go, this one may not be particularly bad. It may not develop into a primary bear market. But the danger that it will is great. Because violent dislocations of the type we saw today are generally followed by widening disturbances. Every now and then the market is entitled to a nervous breakdown."

Copyright © 2007 Worden Brothers, Inc.  www.worden.com, Reprinted with permission