Correction February 2018

SP:SPX   S&P 500 Index
As discussed in the email, we don't know where the correction will end but we have some landmarks with each leg down that give us clues about what may be happening in the bigger picture. First, there is a well-established trend line (dotted orange line) that originates from the 2016 lows. The upper boundary is a copy of that line and the two running parallel form a trend channel. We can see that this channel contained price throughout the last two years up until January 2018 where it suddenly surged up and out of the trend channel. In technical terms this creates an "overbought" situation and normally ends in a steep decline that takes away all of the gains associated with that advance. The first logical stopping point of the correction would be the trend channel lower boundary, which as of this writing is roughly 2% below where we are at present.

However, the downside momentum often creates an overshoot where we breach the lower boundary temporarily before snapping back inside the channel. When that happens the low of the move often creates the anchor for a new, less steep (and probably healthier long-term) trend. It is my opinion that some variation of this is the most probable scenario barring new economic news that changes the fundamentals.

Lastly, it should be noted that the main bull market trend line is considerably lower. This originates from the bear market lows in 2009. If we were to correct all the way down to that line it would meet the definition of a bear market by popular standards (a decline in excess of 20%), but in technical terms we would not be a bear market if the trend remains intact. This highlights the problem I have had with the market for the last couple of years. While I don't think this is a probable outcome at this point, it is a dangerous reality of a 'hot' market. History has shown that we will eventually revisit the main trend line and the farther we move away from it the more shocking the decline just to get back on the 'normal' pace.
Comment: We are back over the channel high and into the the dangerous zone. The new Fed Chair Jerome Powell makes his first major appearance this morning at 10am. The catalyst for the selloff that began in late January was interest rates so this brings us to a potentially critical juncture. As a side note, long-term bonds sold off overnight (indicating rates are moved higher). These next few days may determine whether we continue moving along the same path we have for the last two years or if the market is in the process of making a material change.

One thing is clear though. Note the more quiet price movement of the past two years prior to February and compare these last few weeks to that. Price was slowly gliding upward, bouncing between the channel top and bottom. Now it is moving more sharply, reflecting the increase in volatility. Any change from the status quo introduces uncertainty which often ushers in volatility. If Chairman Powell signals a dovish approach we could see volatility subside and price continue to press higher. If his comments sends rates higher we could see more selling once again.

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