S&P 500 (SPX) — Even though the market managed to close higher in two of the last five sessions, each intraday low has been lower than the prior day’s low.
That pattern eats into support and quickly exhausts available buyers leaving only sellers in the market with nothing remaining but lower prices. This pattern of lower intraday lows crushed the first line of support at S&P 1,080 to 1,085, and with the low of Friday at 1,072, selling is about to enter the next zone of support at 1,020 to 1,070.
Looking back to Friday, Jan. 22, the S&P sliced through its 50-day moving average, setting it up for the challenge of the line at 1,080 to 1,085, and quickly dispatched that support. So, in just two weeks, the stock market has confirmed that a correction is under way.
The market has entered a support zone at S&P 1,020 to 1,070 that took many months to develop, and it enters it with virtually every internal and sentiment indicator oversold.
So, with such a negative background and U.S. stocks cheap, my guess is that Friday’s higher downside volume signaled a near-term selling climax and a rally is about to begin. If it does, it does not signal the end of the correction, but merely a respite from the panic that many investors felt as they were long stocks at the top of a 10-month chase for bargains.
The bargain counters of Wall Street are empty, so rallies must be used as opportunities to raise cash until the next “blue-light special” is announced.
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