The selling was coming, we just weren't quite sure when. Well, it's here now, so how long might it last and how much pain might we endure? Both questions are difficult to answer, but I do know the 3-4 month channel has been broken. That tells me this has become more of an intermediate-term retreat, rather than just a brief downturn. Check out this S&P 500 ($SPX) 6 month hourly chart:
I won't be at all surprised to see the 38.2% Fibonacci level visited. The red arrow above also shows that level to be a key top in November, just before the early-December selling. That would be a very nice ABC correction, something the market has desperately needed to relieve the overbought conditions. Now look at a one year daily chart:
If you're a Fibonacci follower, then you'll recognize the above 38.2%, 50.0% and 61.8% retracement levels. It's worth mentioning that a move down to the 61.8% Fib level would also align very closely with MAJOR price support from the triple top, ascending triangle breakout at 3025. I don't believe we'll go that far down, but if fear really kicks in, that would be a deeper target.
Speaking of fear, I suspect we need to see a bit more panic in the market to set a significant bottom. Here's yet another chart of the S&P 500, but this time with a panel below showing the 5 day SMA of the Volatility Index ($VIX) and the 5 day SMA of the equity only put call ratio ($CPCE):
If S&P 500 price action moves into that green-shaded price support area, watch the 5 day SMA of the VIX. If that moves into the red-shaded area, I'd begin looking for a market bottom and growing much more bullish. The two VIX 5 day SMA readings that reached 30 occurred during a much more cautious market in 2018. I don't view the current market environment the same way. Any rise in that 5 day SMA that nears or moves above 20 will likely mark a key bottom in the S&P 500. This short-term correction is healthy and was to be expected. It's an opportunity for those who've been on the sidelines or for those who sold two weeks ago when I held an impromptu webinar for EarningsBeats.com members, highlighting the market's short-term warning signs, to get fully invested for the next advance. The 5 day SMA of the equity only put call ratio reaching lows rarely seen (below 50) helped to stick a fork in the 3-4 month rally. Now we need to watch for a key price low being set.
In a couple hours, I'll be hosting a webinar highlighting a new Shared ChartList feature at StockCharts.com and also summarizing earnings predictions I made a week ago (hint: the results were outstanding). In addition, I'm going to share a fresh list of nearly 90 (!!!) companies that will be reporting earnings this week and I'll tell you whether I'd be a buyer or seller ahead of those earnings. It'll be a great webinar. Here are the details:
Start time: Saturday, February 1st, 2:00pm EST (room will be open by 1:30pm EST)
Room link: https://zoom.us/j/532677405
Discussion Points: New Shared ChartList feature, how to receive my Strong Earnings ChartList (I'll send out to everyone who attends for FREE), results of last week's earnings predictions, and discussion of more than 90 earnings predictions for this week.
Hope you can join me! If you can't make it LIVE, make sure you're signed up to our free EB Digest newsletter. We'll provide a copy of today's webinar recording and a link to my Strong Earnings ChartList to all EB Digest subscribers on Monday. CLICK HERE to subscribe (again, it's free).
Happy trading!
Tom
