Correction is Under Way
by Sam Collins 02/01/10
Free Trading Guides
S&P 500 (SPX) -- Even though the market managed to close higher in two of the last five sessions, each intraday low has been lower than the prior day's low.
That pattern eats into support and quickly exhausts available buyers leaving only sellers in the market with nothing remaining but lower prices. This pattern of lower intraday lows crushed the first line of support at S&P 1,080 to 1,085, and with the low of Friday at 1,072, selling is about to enter the next zone of support at 1,020 to 1,070.
Looking back to Friday, Jan. 22, the S&P sliced through its 50-day moving average, setting it up for the challenge of the line at 1,080 to 1,085, and quickly dispatched that support. So, in just two weeks, the stock market has confirmed that a correction is under way.
The market has entered a support zone at S&P 1,020 to 1,070 that took many months to develop, and it enters it with virtually every internal and sentiment indicator oversold.
So, with such a negative background and U.S. stocks cheap, my guess is that Friday's higher downside volume signaled a near-term selling climax and a rally is about to begin. If it does, it does not signal the end of the correction, but merely a respite from the panic that many investors felt as they were long stocks at the top of a 10-month chase for bargains.
The bargain counters of Wall Street are empty, so rallies must be used as opportunities to raise cash until the next "blue-light special" is announced.
Related Articles:
Your Guide to Profiting From Asia's Explosive Growth
For access to the best-kept secrets about investing in China and the rest of Asia, plus the hottest stocks to buy and sell, sign up now for Robert Hsu's FREE investing newsletter, Asia Insider. It's sent right to your e-mail inbox every week -- absolutely FREE!
More By This Expert
Don't Get Burned by the Market
Investors who try to anticipate the market's next move may get burned. Your best course of action here is to be patient.
Leverage a Bet on the Nasdaq 100
The ProShares Ultra QQQ (QLD), which delivers twice the daily performance of the Nasdaq 100, hit a new 18-month high this week, and doesn't appear to be stopping.
The market will eventually break to new highs, but it will likely remain within the current narrow zone of support for several more months.
An 'Ultra' Risky Bet on the Financials
If you have the stomach for a high-risk trade that could pay out big, now is the time to buy the ProShares Ultra Financials (UYG).
2 Sectors That Might Keep the Market Afloat
If technology and financial stocks can break through major technical resistance, the market could continue to go up for several more days.
