US Stock Market: Correction Is Mild So Far

Last week we saw that a correction had begun when the price index broke down from an ascending wedge formation. When support is violated, the next thing to expect is for price to snap back up toward the line, which is now resistance. As you can see, that is exactly what happened this week with a short rally that failed later in the week.

What we are left with at this point is a short consolidation with a short-term double top and neckline support at about 880 on the S&P 500 (^GSPC). With the market coming off extremely overbought medium-term conditions, it would be reasonable to have expected a more energetic decline. The fact that the correction has so far taken the form of a sideways consolidation, tells us that the medium-term market bias is still bullish.

That is not to say things can’t get worse in a big hurry, but so far the market is holding up pretty well.

Bottom Line: The predominant feature on the chart is still the developing reverse head and shoulders formation. We are not really any closer to it than we were last week - we still need a correction to about 800 to form a credible right shoulder. I think we could see this happen in the next several weeks.

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