Expect a Near-Term Correction, but Only Minor
By Mike Paulenoff, MPTrader.com
We?re taking the end of the week as an opportunity to look at the
market on a near- to intermediate-term basis. First looking back on the
week, a very interesting situation has developed. This week you made a
new recovery high from last March in the E-mini March S&P at 1155, and
the markets traded between 1150 and 1155 until the Fed on Wednesday
afternoon came out with its latest policy statement. We all know it changed
a few words and the few words definitely changed a few perceptions of
how safe it is to be long some stocks at levels that are, in terms of
the S&P, are almost 50% higher than they were since March 2003. So some
people decided that even if the Fed doesn?t intend to raise rates
anytime soon, just the idea that they?re preparing for it is enough to put
the kibosh on some stocks after a 50% rally.
When the Fed met on Wednesday the S&P had pulled from 1155 to 1140
ahead of the announcement. Then it plunged below 1140, which triggered a
move to 1120. That?s important technically because when it broke 1140
it also took out the trendline from the December 10 low at 1053. That?s
the first trendline break we?ve had in a very long time. And this one,
in particular, was about a six-week trendline, so it?s significant.
Not only that, it broke down into the rising 20-day moving average,
which is at about 1125-26, and broke below it. But as we speak now on
Friday with an hour left in both the session and the week -- and in the
month for that matter -- the S&P is trading at 1130. So it?s trading
just above the sharply rising 20-day moving average. This is important
because the position of the moving average, the angle of ascent,
vis-୶is a decline in the market offers us instruction about how bad the move
in the opposite direction might be.
In this particular case you have such a sharply angled ascent of the
20-day moving average that the first time the declining price structure
comes down to it, it usually holds. And in this case, it looks like it
is doing just that.
So we have a move this week, the first move on the downside that we?ve
seen in a while, from 1155 to 1120. We?ve rallied back to 1130, and my
suspicion is we?ll get back probably to the 1140-38 area before this
recovery bounce will be at its crossroads.
Either it?ll stay a recovery and the market will roll over and go back
down and test 1120 next week towards the middle or end of the week, or
it?ll just keep going and retest the 1155 high. The reason that is
important is that if, in fact, we are building a minor top on a near-term
basis, then we should expect the rally to fail around 1140 and for the
S&P to come back down, break 1120, and move lower. My sense is towards
1090. So that?s the bearish scenario.
If the rally does not respect the resistance at 1140, then Plan B would
be for a full-fledged retest of this week?s highs. In which case
anything could happen, but one thing is for sure: This is not the great
rollover, the beginning of the next bear phase of any long-term bear
market from the year 2000, especially if the S&P goes right back up through
1140.
So right now all I can conclude is that we?re having a minor correction
that?s not finished yet that may go down to the low 1100s or the high
1090 area before it?s complete, and even then I think probably there?s
another upleg after that. Should that scenario unfold, I think you?re
looking at 2-4 weeks, maybe even 6 weeks, of relative sideways, downside
corrective action before the market takes off again.
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