Is The Market Poised For A Correction?

Street Signs

Street Signs

Is the market poised for a correction?

It’s been March Madness for Mr. Market–one week the trend is down, the next week it’s up. So, where’s it heading now?

Judging by the bullish movement in the major averages, it appears as if we’re entering a new leg up. The fact that the small-cap Russell 2000 (IWM) and the tech laden Nasdaq (QQQ) popped to new highs on Friday reflects the fact that it’s been precisely those stocks which have advanced the most. The problem is that this advance hasn’t been mirrored in the larger-cap indices. Sure, the S&P (SPY) and the DOW (DIA) are close to retesting their recent highs and the market-leading Dow Transports is trying its best to rise above its quadruple top at 920 (9200 on some charts). If this doesn’t happen very soon, we could be in for a sharp sell-off.

Why? Last week, a couple of technical signs indicate that a correction may be in the cards. The first involves volatility. The Volatility Index (VIX) has dropped precipitously over the last four trading sessions and is now nearing contrarian levels. It closed Friday at the 13 mark. Should it fall to 12 (or beneath it especially), that would be a strong sign that there’s too much complacency and that a market reversal is in the cards.

The next sign is the fact that soft (agricultural) and hard (oil and metal) commodities reversed their extended downtrends and abruptly moved up. One big standout in the softs was the Wheat ETF (WEAT). The stock popped out of a one month base rising above $11 resistance. It ended the day up 3% on heavier than normal volume.

In metals, the Copper ETF (JJC) jumped nearly 4% out of a two month base. This is a big deal considering that copper is associated with being the metal of choice for countries expanding their infrastructures, most notably China. And if copper is rising, could Chinese stocks also be poised for gains?

Looking globally, most country and foreign currency exchange-traded funds rallied on Friday in direct contrast to the fall in the greenback. The Long US dollar fund (UUP) has been in strong rally mode since its September breakout and was overdue for consolidation.

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