The pop arrived Tuesday, exactly as it should have done after Monday's steep slide. Still, I'm getting the same question now that I seem to get during every correction: How far down will the market go?
Well, let's stop and think about this for a minute. Let's say that, on the other end of things, the upside had been projected to be 1520 on the S&P 500 -- which the index neared or exceeded during each of the first three weeks of February. You would have been rather antsy about the upside for those three weeks, wouldn't you? You may have even used those points as selling opportunities. Yet, if you go back and have a look at that chart, you'll see a market that stalled out the third week of January, followed by three to four weeks of churning.
My point is that, while the market may only reach 1480 or 1490 on the downside, it's now likely to take another three to four weeks of up-and-down action before the S&P will settle down enough for you to buy with comfort. How many times would you get shaken out if the market kept retesting 1480?
The intermediate-term indicators I use are based on momentum, but also on time. It takes time for the market to get from overbought to oversold. It takes time for sentiment to shift. It takes time for declining stocks to stop declining. The process rarely changes. An oversold rally comes, and then the market slips again.
When you look at an indicator such as the McClellan Summation Index, you can see it only just started rolling over. True, in November 2010 such a rollover over led to a minor 4% pullback in the S&P, followed by a ramp ever higher. But, unless you think we're now seeing something similar to that, the chances are this indicator will have to take the time to unwind its current overbought condition.
We're also seeing a little bottom in the ratio between the S&P and the Russell 2000. You might believe this is false, and that this ratio will turn suddenly lower and plunge even more -- but, if it is a true floor, it will likewise take time to unwind this relationship in order for it to return to an oversold condition. (In this case that would mean the ratio touching the top of the page.)
I don't have a measured target on the S&P at the present. As I noted Tuesday, there is some support at the 50-day moving average -- a level where the Nasdaq saw a bounce in the last session. As I've reiterated several times of late, I prefer to wait for the correction to run its course.
Away from the U.S. indices, I want to follow up on Italy. A few weeks ago I framed the FTSE MIB as a bearish chart, but a reader asked if I could make a bullish interpretation. At the time I said that, while folks might not like it, I drew in a support line on this chart and noted that it was easily 10% lower than where we were at the time. The Italian stock market does have support as it heads toward the 15,000-ish level, and I would expect a bounce from this zone.
Perhaps I shouldn't say this, since it seems so obvious to me -- but should the FTSE MIB rally from 15,000-ish and fail around 16,000 to 16,500, it will show a head-and-shoulders top. For now, however, I would seek a bounce from that support area.
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