Market Is Strong, But Correction Should Continue
by Carl Swenlin
November 6, 2009

Looking at the S&P 500 chart below, the breakdown from the ascending wedge pattern is clear enough, and expectation of the breakdown has been fulfilled. The rising trend line violation brings with it the expectation of a continued decline, but I do not have a price target at this time. The horizontal dotted lines show the closest and furthest likely support levels, but I have no expectations regarding either one.

At this point, I am still expecting a price low at the end of this month based on the 20-Week Cycle low projection, but it doesn't look as if the price correction will be too severe. My reasoning is that so far short-term oversold conditions are generating very strong bounces. Of course, this could change in a heart beat, so keep an eye on it.

Technically speaking, we do not yet have a down trend -- we need a lower high and a lower low.

When we think of a correction, we usually imagine a fairly straight forward decline, but there are other possibilities, such as a consolidation phase. When I looked at the longer-term chart below, it struck me how similar the current rally is to the rally off the 2003 low. There was a sharp leg up, followed by a short consolidation, followed by another leg up. At that point, many people expected a corrective decline. Instead, there was a sideways consolidation with a modest downward bias. I do not assert that the same kind of pattern will evolve this time. I just wanted to illustrate the possibility of other outcomes.

Gold hit an all-time high this week, and it is rising in the face of rising currencies. Gold typically falls when currencies are rising, so many analysts are suggesting that people are starting to view gold as the new reserve currency. On the chart below you can see that gold is being contained by a rising trend channel, so the next move should be back to the bottom of that channel; however, if people are moving away from paper currency, there is the possibility for gold to go ballistic.

Bottom Line: Based solely upon the rising trend line violation, I am assuming that the market is in a corrective phase that will last for several weeks; however, a declining trend has not yet been established, and my assumption could be premature.

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MECHANICAL MODELS

We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. Daily tracking of these signals is available to subscribers in the Decision Point Alert Daily Report.

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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.