Given my name, it’s only natural that I’m a big rock n roll fan. Ironically, my parents were classical music fans and didn’t even know of the Rolling Stones existence. Anyway, I sometimes like to tie rock songs into the theme of my blogs, such as here.
Today, I thought I’d bring back R.E.M’s classic “The end of the world” song for the theme of the blog. Here’s the video for their song.
Wow! The market has had two full days of corrective action! One of which (yesterday) was more than 1% down. One had to wonder if markets were ever going to experience 1% corrective days again- in fact, I mused on this here. I’m actually very relieved that we are seeing some healthy corrective action, at long last.
I was asked in the comments section from Monday’s blog about the potential downside for the now obvious correction by a long time reader. My comment back to him: That’s the question of the day, isn’t it?
Here are two arguments for a potential target on the S&P 500 is either 2700 or 2500. Let me explain:
The 2700 target
My 2700 guess is based on the support in that area. As I noted on Monday’s blog, the S&P has been sitting about 12% over its 200 day SMA. This condition was bound to change (got that one right!). Typical bull market conditions are for a trending market to stay around 5-10% above its 200 day SMA. A retracement to 2700 would bring the S&P 500 back to about 8% above the MA. That would be healthy and sustainable.
The 2500 target
In addition to the support points and the normalization of levels over its 200 day SMA, I will be paying attention to the RSI line. Often a correction within a bull trend (which I assume this is…) will see RSI return to the upper middle of its range. Assuming this is not a deep correction where RSI can move to the oversold side. On the chart below, you can see that the RSI indicator kind of likes hanging out in the upper half of its band— (green rectangles).
At this point–RSI is too high on both daily and weekly charts. I’d guess that a return on the weekly chart of 14-week RSI to about 60-ish might bring the S&P as low as 2500 if it moves violently down to eliminate the overbought conditions.
All of the above (my favorite exam answer)
Or, it may correct to 2700 neartermed support and tread water (which would allow RSI to settle down). Either scenario is quite possible.
Either way, I’m waiting a bit longer to see if I can pick up some bargains with the 15% cash we have been holding since December. I think this selloff is a buying opportunity. I am not convinced that it’s the end of the world for stock investors just yet.
Keith on BNN Televisions MarketCall this coming Monday February 5th at 5:30pm
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