I saw this long term SP500 chart from 360virtual and thought it does a good job putting the current correction into perspective. Interestingly yesterday we hit the average annual yearly pullback of 11.5% almost exactly. It should have come as no surprise as have been talking about its eventuality for (too) months. So now what?
There are no guarantees on what the markets will do next but TA teaches us what is possible and I wanted to lay out what I believe is the likeliest outcome for the short-intermediate term based upon the tale of the charts.
Tuesday’s action was a very compelling tell as the markets could not hold on to their early morning gains showing that whatever was bothering the markets still is. Until this gets resolved we are going to struggle to move materially higher. A “V”-bottom like we had for the entirety of 2014 appears to be unlikely right now. As such with a weak tape and overhead resistance I see lower prices ahead.
Below is the SP500 daily chart illustrated with all the important horizontal (blue) support and resistance (red) lines. It’s important to remember those lines represent buyers (at support) and sellers (at resistance) if/when price approaches. As we know corrections are typically 3 wave (A-B-C) structures. The first wave down is A, a reflexive bounce higher is B and the final wave down is C. My view is yesterday completed wave A and are now in wave B, the oversold bounce higher. Upon completion of B we will need one more test lower to complete C. You can see I have illustrated the chart with an ABC pattern and where likely “B” and “C” terminations will end (if this truly is an ABC correction). I expect “B” to end at or near the December 2014 lows ($1972) as this represent a previous large supply of potential sellers. A retest of the lows could find “C” zero in on the Oct. 2014 lows, $1820, an important past level of buyers. I have also placed alternative “B” and “C” termination points (the next level of support (buyers) and resistance (sellers) levels) should the market wants to overshoot to either side.
As we know the markets will do what they are going to do and no one, including me knows what comes next. Trying to predict the future is a fool’s game. So one may ask why put these types of posts out for ridicule since it likely I will be wrong. The fact is what I have posted is one likely outcome and situation planning is what we do every day in our Investment Committee meetings. It’s our job to analyze the possibilities and work through the necessary action plans should they play out. Like Geico says, “It’s what you do.”