Don't Panic In a Market Correction Like This

While Harry and Rodney tackle global economics, it’s my job to stay on top of the markets.

Yesterday was a big day. Unfortunately, it was a big down day. After resolution of the presidential election, broad market averages dropped a little more than 2%.

I’ve learnrned not to panic in market corrections like this. Instead, I keep a cool head and take a long look at the charts. This helps me plot out a “battleground” of potential scenarios. My goal today is to figure out when the market’s correction is likely to end.

Here’s the chart of S&P 500 futures that I’m looking at:

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I mentioned in an earlier post that the 38.2 Fibonacci level came in at 1,383.70 on the S&P 500. This is the first level at which I was expecting the market to find significant support. Not only is this price at a significant Fibonacci level, it’s also the price that acted as support in early September when the market rallied into the Fed meeting.

Well, sure enough the market’s sell-off was halted yesterday at 1,384 – precisely the Fibonacci level I was watching. I’ll admit, it doesn’t always work this perfectly… but when it does it’s pretty impressive.

Now, this doesn’t mean the correction is definitely over. But simply knowing the market found support at this level, I know to watch closely for a bounce higher.

If the market continues to decline instead, the next stop on the way down should be around 1,360. This price level should act as support for two reasons. It’s another significant Fibonacci level – the 50% retracement. It’s also roughly the price of the S&P 500’s 200-day moving average. This is hands down the most common indicator that investors watch, and it often acts as a support level.

In fact, the 200-day moving average acted as support beautifully earlier this year. The market declined around 11% from April to June, but when the S&P 500 fell to its 200-day moving average on June 4 the correction was immediately halted. The market went on to rally 17% from that point.

The next few days will be crucial. If the S&P 500 closes above 1,400, long investors should be able to breathe a bit easier. I’m keeping a close watch. Stay tuned.

If you haven’t done so already read the Survive & Prosper issue on “Inside Demographics School – Day 2.”

 

 

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.