There certainly is a lot of anxiety out there in the market right now and understandably so with prices as high as they are and a lot of things happening right now that we normally see much earlier in the rally. So, it’s been tricky.
As an example, we’ll look at the S&P 500 for a minute, which has been doing fairly regular extensions, so it’s been pretty robust. In an uptrend, it’s not uncommon to see a drawdown in a stock or index and then a rally that’s about 160% of the drawdown amount. As an example, if a stock were trading at $100 and it drew down $10 all the way down to $90. If you take that $10 and multiply it by 160% or so, you get about $16, so you would project to the upside about $106 if the trend were to continue.
That’s been working out pretty well on the S&P 500. For example, if we go back to the most recent major retracement, which is going back to 2011 to the debt ceiling crisis. On the chart in the video, I draw a Fibonacci retracement that covers that draw down July 2011 through October 2011.
On the chart in the video, you can see that 161.8%, so that’s the 160% I was talking about. Sure enough, the market basically got to that level to the penny by February 2013. That same thing that happens within a bigger cycle will happen within a much smaller cycle.
For example, if we look at the last little retracement on the S&P 500’s chart in 2012, it’s certainly not as big as the one in 2011, so we can project and make the same kind of an estimate. So, if the rally continues – which is the underlying assumption – we’re trying to project how far is it likely to go before it starts to consolidate again?
In this case, the little retracement has gotten us basically up to 1,554 on the S&P, which is pretty much where we are right now. So, when you see the market doing things like this, traders get a little bit nervous.
And, by the way, this works on even a very short-term basis. On the chart in the video, I show you that we have a cycle within a cycle. That’s not uncommon. In fact, that’s the norm in an uptrend. These cycles are kind of fractal in nature and they’re embedded within each other.
Right now, we’re bumping up against that target where we get a little nervous about whether or not we’re going to get a correction.
Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.