The S&P 500 and a 20% Correction
Why are so many calling for a large correction? I am sure there are lots of good reasons but let me try to explain what the chart might be saying.
The S&P, as an indicator of the general market, got up to about 1550 in the year 2000. Then it gradually declined to about 800 by 2003. After that decline, the S&P gradually rose back to 1550 again. But again it turned down and this time declined to about 700 by the year 2009. Notice the horizontal line on the chart below. Also notice that the first two times the S&P gets to about 1550 it turns around and heads lower. This is classic "resistance".
In 2009, after hitting 700, the market began going back up and really hasn't stopped. In the recent past we have seen a high of almost 2000. Wait! What happened to 1550?? Looks like we skated right on through that level this time.
Now that the S&P has gone through that 1550 level should we just forget about it? I don't think so. It may come back into play sometime in the future. Remember that resistance can become support. If it does, that means the S&P will revisit that 1550 level and then turn and go higher.
In case you missed it. I will ask the question again and answer it again...
Why are so many calling for a large correction? Because if resistance becomes support, then the S&P has to go back down to 1550. IF (the caps are not a typo) the S&P goes back down to 1550 then the market will have to drop about 450 points from the intraday high we saw in July. That equates to a better than 20% drop in the market.
Does all this make sense? When you hear someone say, "the market may decline 20ish% in the next 6 months" just realize all they are really saying is that they believe the S&P may revisit that 1550 level.
This is a Monthly chart of the S&P 500
| Click the chart for a larger chart of SPX |
Let's talk about UT 1, UT 2, and the ellipse at the top
UT 1 is an uptrend line that started back in 2009 and has held strong ever since. UT 2 is an uptrend line that started in 2012 and has held strong since. Notice that UT 2 is steeper than UT 1. That indicates faster price growth. The ellipse at the top is just meant to call your attention to this area of the graph. I would say that many investors are looking at the August candle to see if it will close below UT 2. They will keep looking at new monthly candles until they see a shift in sentiment. All of this is inside the ellipse. If a candle closes below UT 2, then the next trend line it may ultimately fall to is UT 1.
