Determining a market correction or change of trend

The chart above is a daily cash S&P 500. We would like to point out a few of the significant developments shown here. Certainly, we will either miss or leave out a few, but our intention is to bring attention to what may potentially be developing.

First we see that the market broke through and closed below two near or short term support levels. Those would be the 20 day moving average (in red) and the up trend line connecting the July and September lows. We will note here that the 50 day moving average (in blue) is currently 1020.73 and represents another key level and barometer of support. We believe a close below that would bear some weight.

Today’s penetration and close under last Friday’s low of 1041.17 confirms a series of lower lows and lower highs which is a key aspect of trend definition. The next up trend line underneath the market which connects the March’09 low and July’09 low came in today at approximately 1008.00. A close below this would likely be a very significant development. The Fibonacci retracement levels using the July low and September high are 999.61; 974.735; 869.32. These mark potential levels of support.

Now from a larger prospective we will point out that from the October 11 2007 high of 1576.09 to the March 6 2009 low of 666.79 there were what we interpret as a full 5 wave structure completed. From what we understand of wave theory a 5 wave structure defines trend direction. The price move since the March 6 2009 low appears to this point to have gone in a distinct 3 wave pattern, marked by A-B-C. We understand this to be corrective. For those ascribing to the secular bear market theory this could then, mark the end of the proverbial “Bear Market Rally.”

As Yogi was known to say “it ain’t over til it’s over.” We won’t know for sure if what is occurring is the start of a normal correction like was seen during the June to July time period or if in fact this is the start of something bigger and more bearish until we get further along in the pattern development. And in reality we won’t truly know until it’s over.

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