Wednesday, June 5, 2013

Market Update: Near-term correction continues....

Over the last few weeks, I've been writing about an expected correction in the market. I would say at this point it would appear that equities are clearly in corrective mode. 

On Monday, when I last commented on the hourly S&P 500 chart, the index had broken down through the triangle formation and was attempting an anemic, reflex-rally back to new resistance at the 1640-1645 level. As you can see in the updated chart below, the S&P 500 was able to climb back almost exactly to that level, which coincides with the triangle's downward trend line. 


The index then immediately rolled over once hitting the trend line and now resides at 1624. Since the peak on May 22nd, the S&P 500 has made lower highs four times by my count, not something one would consider bullish. Near-term support looks to be 1620.

Viewing the daily chart below, you can see that approaching 1680 the S&P 500 was quite extended from its 50-day moving average. It has since closed at least half of that gap.


After support at 1620, in the chart above it's much easier to see next support at 1600, which is the approximate level of prior highs in April and also the approximate value of the 50-day MA. 

Overall, the S&P 500's daily chart continues to look bullish. The stochastic is now oversold and I would expect any further weakness to be contained in the 1600-1620 range.

With regards to the stochastic, note that prior to its recent decline it enjoyed several consecutive days traversing at an extreme overbought level (see red rectangle). When this happens, the stochastic remaining at an extreme overbought level for many consecutive days, it's a very bullish occurrence. For lack of a better term, I call this "good overbought" (bullish overbought?). More often than not when the stochastic oscillator hits overbought levels, it indicates the move is extended and likely running out of steam, i.e. bearish. But when it remains elevated consistently for days, the stochastic is indicating impressive momentum has occurred and built up, meaning there is thrust that tends to have carry-through, enabling price to have forward trajectory even beyond an initial correction. Note that "good overbought" occurred for most of January. And I would add that all of this tends to hold true on the flip side, i.e. there is "bad oversold" (extreme oversold momentum + duration).

It's for this reason ("good overbought") coupled with the overall bullish daily chart that I expect this recent correction to be short-lived, with the market most likely regrouping at the 1600-1620 level before making another run at prior highs. In short: for now, this market correction remains a healthy one.

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