The ascending wedge pattern we discussed last week has broken down as we expected. Considering that the market has rallied nearly 40%, I think it is reasonable to expect more corrective action.
The next development to watch is the possible formation of a reverse head and shoulders. We currently have the left shoulder, head, and neckline. The correction that has started could result in a right shoulder, if the correction does not turn into the next leg of the bear market. The ideal resolution (if you are a bull) would be for the correction to end in the area of 750-800, then for a rally to blast up through the neckline. If that were to happen, the minimum upside target would be equal to the distance between the top of the head and the neckline -- about 1200. Interesting to contemplate, but, hey, we are way ahead of ourselves at this point.
As you can see on the chart below, intermediate-term indicators are still very overbought. This evidence supports the idea that the correction is not over yet.
Bottom Line: The short-term indicators, although oversold, have shifted from a persistently positive range to a more normal range. I interpret this to mean that the invincible nature of the rising trend has come to an end. Coupled with the fact that medium-term indicators are still quite overbought, my conclusion is that there are probably a few more weeks of correction ahead of us. The appearance of some elements of a reverse head and shoulders offer some hope that a major bottom could be forming, but it is too early to turn up the optimism in that regard.
