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Archive for February 4th, 2013

Posted by Martin February 04, 2013

A correction? Finally!

A correction? Finally!

Today, we probably have experienced a long anticipated correction to this extended market. It was a very impressive run, but in my opinion the stocks got expensive. Almost all indicators were in heavy overbought territory and a break was imminent. The question was, when. Was Monday the beginning of a correction? If so, I would say, finally!

I believe, and many stock charts confirm it, that no stock, no market goes straight up. It goes up in a seesaw trend, two steps up, one step down and so on. And if it happens going straight up as we witnessed a few weeks ago, then soon we would witness that one step down.

So can Monday be considered the beginning of a correction? It depends. From the pure technical analysis perspective the picture is not as clear as I would wish. The down candle stick wasn’t extended marking an exhaustion. So today’s trading may be just a little bump on the upward road.

If we however are in a correction, the next question would be, how deep and how long will it take? A million dollar question. As a trader I would care. As a dividend investor who wants to build an ever flowing income stream I do not care that much. I just take this as a new opportunity to add more shares into my portfolio for cheaper price.

Now the time has arrived to start watching my holdings and the stocks in my watch list even closely, because they may present great prices to pick up. For example, my latest trade was buying shares of Lorillard which I bought for 39.64 a share. With the correction when most of the stocks follow the entire market, I can add shares for even 38.20 a share (current support). Or even for less, if the stock breaks the support.

SPY

The chart above indicates my anticipation if I am correct in regards to selling in the market. Three indicators I use were in overbought levels and two of them already slowing down. Chaikin Money Flow, indicating whether money flow into the market or out of the market already turned down in January showing investors pulling their cash out of the market. The Ultimate Oscillator also started falling at the end of January. MACD followed today. You can see a slowdown and turning down.

Another indicator I like to watch is Fear and Greed index. Today’s chart shows the market dropping from extreme greed. We may potentially go all the way down to 40-ish level. How quickly and how fast, I do not know. It can be a slow volatile, bumpy process as we could see at the end of 2010 and beginning of 2011 or fast and almost straight drop as we could see at the end of 2012.

Fear & Greed Over Time

Such a drop however doesn’t mean a catastrophe. I actually see it as a healthy movement. A movement, which provides us with great prices while others are panicking. Also a drop to 40s doesn’t mean that the market will go that deep too. Fear & Greed index is more about volatility, rather than trends.

But how deep will we be going?

My first expectation would be where the support is. When you take a look at the SPY chart above, the market easily broke above a resistance level created by two major tops, one in September 2012, second in October 2012. We approached that resistance in December 2012 and corrected. Later, in January we broke thru without any resistance. But then the market slowed down. The new money flowing into the market dried up. The previous resistance became a support (see the green thick line at $146.85 level). My expectation, though, would be a pullback to that support. The next level would be at 144.73 (50 day MA) and worse case scenario at 140 level, but unless something terrible happens I do not expect going that far down.

Well, time will show. Get your muscles ready (read money), because we may see a great opportunity adding more shares. If you do not have your cash ready, you would have to wait and pass this opportunity.

Happy Trading!