S&P 500: Possibility For A Correction Down Toward The 950 Level

It is my observation that a lot of our time working with the market is spent waiting for something to happen. One of the problems with playing options is that options will expire before the expected price move takes place. In other words, the market can prove you right, but not in the time allotted. Fortunately, we are not currently on a time schedule as we await the market’s next decisive move, but it is tedious nonetheless.

The primary issue now is whether prices are going to break up or down out of the ascending wedge pattern. A strong up move last week gave the impression that there might be a breakout attempt this week, but prices immediately stalled just below the overhead resistance presented by the top of the wedge pattern, dribbling along with no effect.

A positive side effect of the sideways price action has been to provide a pause that allowed short-term overbought conditions to be relieved. A prime example can be observed on the CVI (Climactic Volume Indicator) chart below. After the strong upward thrust last week, the CVI has retreated back to the zero line and is oversold enough to allow another leg up. However, the two longer-term indicators on the chart show that there are still some medium-term overbought conditions that need to be worked off.

Bottom Line: Because there was no follow through (breakout) on last week’s rally I find myself less enthusiastic about a breakout that is not preceded by a pullback. Our long-term and medium-term buy signals require that we remain positive overall, but I am beginning to see the possibility for a correction down toward the 950 level.

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