US Stock Market: Correction In Progress

Last week I wrote:

I am expecting some kind of correction, possibly a short consolidation - a week or so - or a quick, scary couple of down days.

So far we have had a little of both. Monday the S&P 500 (^GSPC) had a scary -4.3% down day, and the rest of the week prices moved more of less sideways, recovering all of Monday’s losses by mid-day Friday. For the week the market had virtually no change. The price action helped to relieve the short-term overbought condition, and broke down a small ascending wedge that had been forming over the last few weeks (not drawn on chart). The break down was technically expected, but, being a short-term formation, not much downside follow through was expected either.

Note that the support of the declining tops line, recently penetrated to the upside, is continuing to hold.

The medium-term overbought condition has not been relieved in the least, as you can see by the breadth and volume indicators below. If the current mini-bull market (bear market rally) is not over, the overbought conditions do not have to be a problem, because prices can grind higher or sideways as overbought indicators move back toward the neutral zone. At this point we need to be attuned to how well or poorly the market behaves as the overbought conditions clear. The better the behavior, the more likely that the rally will continue higher. The worse the behavior, the more likely the bear has stopped resting.

Bottom Line: The market continues to behave in a positive way in spite of being overbought. Support has held, and the needed correction has so far proceeded with virtually no price damage. It is still early, but it is possible for the internal correction to continue without a substantial decline, or even with prices moving higher. My opinion is that bullish influences still have the upper hand, and that the bear market will not resume yet.

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