Signs of a Market Correction

Any market correction will be probably of very short-term nature and will serve the purpose of shaking out weak hands and establishing a fresh base for another leg up. The exact timing, magnitude and duration of such corrections are of course unknown.

SPY_20130214

Although Wilder’s RSI(14) indicates that momentum is building up, Cutler’s RSI(14) points to a slowing momentum, as it is shown in the middle bottom pane of the SPY daily chart above. This is the first indication that a short-term correction is pending. In addition my indicator, the MEI(14), which is also a momentum indicator, is signalling a reversal since last week.

Strong support is located just above the 40-day simple moving average at the high of September of last year and near $148. If the market reaches support, a re-evaluation of technical conditions should take place to access future course.

Can the market surprise us and keep moving up? Of course, this is possible and it has happened in the past as markets can stay flat for a while instead of correcting.  This is why risk and money management through the application of stops is as important as determining the entry point. It is good to never risk more than 2% of your bankroll on any given trade and you will have plenty of chances to enter in a trade that you can ride and make good profits. But, it is easier said than done…

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”) 

Disclaimer

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