Joined Nov 11, 2007
1,458 Blog Posts

Correction or Consolidation?

Yesterday was the biggest down day for the Dow Jones since July, and the 4th down day in a row for the S&P 500. Both the Dow Jones and the S&P 500 are sitting just above their 50 day moving averages while QQQ sliced beneath 50 day on Tuesday. The S&P 500 made a slightly lower low meaning that the trend has changed.

Earlier this year the S&P 500 began correcting in early April and found a bottom on the first of June. This correction eroded more than 9.5% from the index. Should we expect another 10% decline? Or is a pullback of 5% more likely?

Average Frequency of Market Corrections

  •  5%: 3 Times Per Year
  • 10%: Once Per Year
  • 20%: Once Every 3.5 Years

Source: Capital Research and Management Company. Period: 1900-2010.

Since we’ve already seen a correction (or near correction) this year of ~10%,  should we instead be looking for a more shallow pullback? I think so. The current pullback has shaved almost 3% from the S&P 500. We can shave another 2% or more and still be watching completely normal market action. In fact, due to the low volatility of 2012, I’m not sure we’ve seen 3 instances of a 5% pullback yet this year.

My indicators are pointing towards an immediate bounce, but I do not think the bounce will be sustained. Instead, I’m looking for another lower low and some consolidation around the 50 day moving average. I do not think we will see much more than 2-3% downside from Wednesday’s close.

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  1. aimdal

    I think your sentiment indicator are rightly bullish. The VIX has a great downside bar pattern triggered so bullish for stocks. My pattern analysis in FTSE MIB (i’m an italian trader) is strongly up for the next five days.. and in my intraday basis pattern trading bulls are in move too..

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  2. Mrkt_Rwnd

    With volatility so persistently low, have to agree with consolidation for now…


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