Major Correction or Bear Trap?

February 26th, 2013

by Dominic Cimino

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There are presently many analysts and commentators warning about an imminent market top and the potential for a significant correction. Numerous potential stumbling blocks stand ready to inhibit any further market gains, and according to the Bespoke Investment Group, this current S&P 500 rally is the 10th longest in days without a 10% market correction. Yesterday's big sell-off could be the beginning of a large correction. But maybe it has set the foundation for a bear trap instead.

In regard to the long streak referenced, Bespoke also mentioned in their study that the longest streak on record was 2,553 days, and the ninth longest was 650 days. The current streak stands at 512 days. So how much longer can this streak continue?

I have no idea. Perhaps it's ending right now as the market moves lower from recent highs. But I do know two things:

  1. We will only know in retrospect if a significant correction is unfolding.
  2. Markets are still above support levels.

This first chart is the S&P 500 Index. The major, minor, and minor-minor bullish trend channels are depicted as the parallel red lines of varying degree. The major one is widest, while the minor-minor is narrowest. Notice that the index still rests above the minor-minor trend channel support line – the index's first level of support.

Next are the Russell 2000 Index and the Dow Jones Transportation Average Index charts. Notice how the indices rest above their respective horizontal red lines, which represent previous all-time highs in each index and now offer support.

The analysts and commentators warning about a market peak could indeed be correct, and perhaps a major top is already in place. But they could be wrong as well, and the market could be presenting a bear trap for those shorting the market. If you watch the support levels I've mentioned, you may perhaps better gauge your sentiments on this issue. If support levels hold, or are only temporarily breached, it could be that the market moves higher and traps any bears that have shorted it. On the other hand, any true breaching of these support levels may indicate a significant correction is under way. My advice is you plug your ears and watch the charts.

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.


© 2013, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

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