A Correction Is Due

Market Overview

Hope that trade negotiations with China will bring some tangible results have kept the SPX in an uptrend for the past few days, but the technical picture shows a market which is on its last leg. This is apparent with whatever methodology you are using. The extended projection targets are being met and the indicators are showing negative divergence with deceleration evident in the price pattern. EWT analysts also see the conclusion of the wave pattern from 2346. In other words, SPX can reverse at any time, and breaking the trend line which currently lies just a few points below Friday’s close should be the trigger. 

As the near-term picture comes into focus, so does the longer term. The extent of the rally from the 2346 low has nullified the possibility that this move is a secondary reaction. It has surpassed the maximum retracement limits, and while short-term indicators are forecasting a correction, intermediate and long-term have gotten back into a bullish pattern. This means that after the coming correction – which can still be fairly extensive – the odds that the index will go for new highs has increased. 

Chart Analysis  (The charts that are shown below are courtesy of QCharts)

SPX daily chart

The index briefly paused at the 200-DMA before going through it. That does not mean that it will keep on going! Although it is tempting to use the previous peaks as examples (all of which went above slightly before turning down) the market condition is not similar. Those peaks were the culmination of rallies in a larger downtrend, while this rally will peak for the reasons given in the Market Overview and should not lead to the resumption of a sustained decline, but only to a normal correction which should start as soon as price moves outside of the dashed channel. 

Without making things too complicated, a quick estimate of the retracement would be for SPX to do a kiss-back of the red downtrend line, where it would also find support at the 50-DMA. I had initially estimated that a correction could take place into the middle or the end of the month. It looks as if the middle of the month is going to turn out to be the high of the move instead, with prices correcting for the rest of February. 

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Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses the course of ...

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