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A Correction is Underway as Volatility Increases

David Becker
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www.iforex.com
A Correction is Underway as Volatility Increases

The S&P 500 is down less than 3% from its all-time high and still in a long-term uptrend. Even though this week’s decline could extend, it would take a lot more selling pressure to affect the long-term uptrend. The index has experienced three declines greater than 4% this year. Another decline of 4.0% would carry the index to the 1930 area, which is another 40 points lower. This would break trend line support for the large cap index, and could generate additional selling. After breaking through support at the 50-day moving average, and then recapturing that level, the next level of target support for the large cap index is 1945.

Small-caps continue to endure the most of September’s selling pressure and show relative weakness. In fact, small-caps are lagging large-caps by their widest margin in three years. The S&P Small-Cap 600 peaked well below the summer high and reversed near the 62% retracement. The index is down around 5% this month and testing the early August low. In reality, however, the index closed below the 1-Aug close and this week’s low is below the 2-Aug low. This means a lower low now goes with the lower high and a downtrend is underway.

Moving one notch up the market-cap scale, the S&P MidCap 400 has a potential double top brewing. The index reversed near the summer high and pulled back with what looks like a falling flag in mid-September. Instead of breaking out, the flag continued to fall and the decline accelerated this week. The double top is as yet unconfirmed and it would take a break below the early August low to confirm this bearish reversal pattern. The trend remains up until confirmation.

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