The ABC’s of a Bull Market Correction

A phenomenal run in January capped a phenomenal 15 month run higher in the stock. Then came the dark days of February. February 9th marked the first time that the S&P 500 ($SPY) had touched its 200 day SMA since the presidential election. A quick bounce there and it seemed that all might be well.

Price over the 200 day SMA is one of the most basic tenets of a bull market. The S&P 500 reversing there seemed to have reset many overheated indicators and put it back on track.

But markets generally are not that simple. A bounce to 78.6% of the initial correction brought the Index back within striking distance of its previous high in familiar ‘V’ shaped recovery.

The Nasdaq 100 did even better reaching all the way back to the prior high. But after a strong start to the week, Tuesday brought a return to selling and it accelerated into Wednesday’s close. As I write Thursday morning the S&P 500 is down in the pre-market hours, extending the loss. How far will this continue?

Experts will tell you that a major correction is long overdue. Don’t believe them, they have no idea. Nobody knows how far a move will continue. I do not know. But in following price action one guideline has been pretty accurate since the 2009 low. This set of tools, Elliott Wave techniques, suggested an intermediate term top in the 250 to 280 range in the SPY, and then some chop.

These tools are fractal in nature so they can also be applied to shorter timeframes. And when they are it shows the initial move lower to possibly be the start of a ABC corrective wave. This would give a target for the current downward leg to about 246. That would be the first break below the 200 day SMA since June 2016. Will that be the end of it? Again nobody knows.

What will signal an end to the fall in prices is a rise in prices (yeah, I know, duh!). For me the end of downward price action would then be a move over point B. Until then watch, hedge, look for downside and upside opportunities. Develop that list of stocks you have been telling everyone you are dying to buy on a pullback.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.