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April 16, 2012

Clues for a Stock Market Correction

Several, pertinent market developments suggest the equity correction discussed in the last blog post is now upon us. Beginning with the weekly view of the S&P 500, we can see that a key trend line has been breached:

SPX Weekly

A weekly swing high along with a break of the intermediate cycle trend line are requirements for a decline into a cycle low. With these actions in place, stocks should head generally lower for 2-4 more weeks. Another suggestion of further weakness comes from the daily view:

SPX Daily

Moving average crawls are continuation patterns, so we should see a break in coming days ushering the next leg lower. One could also view the last few days as a mid-point consolidation, in which case price projects to SPX 1300 before any sort of bottoming attempt can take place.

Our final clue to impending weakness comes from the action in a market bellwether.

AAPL Daily

I find no small coincidence in the fact that Apple shares have begun to break down just when the stock market is due for an intermediate-degree correction. As I noted months ago in the Member Letter, equities are due to set a significant low in late April or early May, so the current action comes as no great surprise.

However, I do not believe we will see major damage done to equities at this point. Stocks should post a quick and scary drop, finding support perhaps at the SPX 1300 or SPX 1260 pivot, followed by a quick rebound. Traders seeking the arrival of the next cyclical bear market will need to look forward to the next intermediate cycle. Stocks should set at least marginal new highs over the summer. Depending on the nature of that rally, we will then judge whether a cyclical bear will take hold along with the next intermediate decline this autumn or whether the bears will have to wait for another year.

 

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