S&P 500: What is a Reasonable Retracement?
The dramatic market sell-off from September of 2008 through March of 2009 is still fresh in the minds of many traders. There is a certain level of fear that we could return to the complete debacle we lived through then.
Markets are like pendulums. The bigger they swing one way, the bigger they swing back. We had the mother of all swings in that ‘08/’09 collapse, and a huge swing back in the other direction from March to mid January.
The swings will continue, but the question is: with or without the same severity? Some believe the dollar’s strength is a reason to panic and get out of the market. However, it just may be that the market has been selling off because it was ready to. Perhaps it was just looking for an excuse to get into a corrective phase after 10 months of moving up, and the dollar strength just provided the excuse.
By reviewing the S&P 500 chart from the March lows, we must attempt to predict where we could end up as this present corrective phase runs its course.
The S&P has come off 9% from its top and that may not be enough. The S&P 500 has the potential to put in a full 15% correction before resuming it’s upward climb. 15% appears likely because it represents a nearly perfect 38.2% Fibonacci Retracement of the entire Mar to Jan move. This is a logical and totally acceptable correction in an ongoing bull market, a bull that possibly has several more years to run.
There may well be a bounce in the S&P before we head lower. The bounce could take us back to about 1110 before resuming the final leg of the correction.
Once we start into the final leg, we could see the S&P 500 trade all the way down to about 975, where there is a slew of technical indicators suggesting there will be major support.
As comfortable as I am in these predictions I must confess to being unable to confidently predict the time frame. It could take a week, or we might grind all the way through the summer to get through this process. However, I believe it’s more unlikely to run through the summer because markets tend to go up a higher percentage of the time, but when they go down it happens a lot faster. Fear is a stronger market influence than greed, and the big players tend to sell faster when the fear factor kicks in.
Since the bullish phase took 10 months to complete, it should not take 8 months to complete the correction.
When it does, get ready for the next big leg up.
