We Could Be in for a 10% Correction
by Sam Collins 10/05/09
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This may seem like "splitting hairs," but it is just this sort of activity that creates support/resistance lines and many of the other tools that market technicians use to help determine whether markets are overbought or oversold.
Another indicator that I like is the Relative Strength Index (RSI). This is an overbought/oversold oscillator, and it is used to identify buying opportunities in market dips or selling opportunities in market rallies.
It is expressed in a number from 0 to 100 with generally accepted levels of very overbought between 70 and 80 and very oversold between 20 and 30. But these extremes usually occur at the very tops and bottoms of major market trends and deep corrections. For example, the day following the bear market low on March 6, the RSI was at 27.56.
Within the current bull channel, the most recent S&P low was at the last point of the support line. It occurred on Sept. 7 at 48.04. The low before that was on Aug. 17 at 51.45; that, too, was a support point in the channel.
The S&P 500's RSI on Friday's close was 44.28. In other words, the RSI is telling us that on Friday the market was more oversold than each of the last two support points.
Conclusion: The S&P 500 is now 5% from its September high, a mild correction. The RSI, the 50-day moving average and the support line of the current bull channel are telling us that last week may have marked another low in a bull channel uptrend and that stocks could again be bought. But the penetration of last week's lows on a close would lead me to conclude that we may be headed to the next support zone at 980 to 1,010 for a full 10% correction.
Keep an eye on the RSI since it tells you when the market is overbought or oversold.
Today's Trading Landscape
Earnings to be reported: Mosaic Co. (MOS), Robbins & Myers (RBN) and RPM International (RPM).
Economic reports due: ISM non-manufacturing composite index (the consensus expects 50), and Conference Board Employment Trends Index.
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