What correction? So far, those who promoted the idea of a “V” shaped bottom have been proven correct. We shot back up through the 200 day moving average just as quickly as we crashed down through it last week. We now find ourselves “in the pocket” so to speak, the term I’ve taken to using for the area between the 125 day and 200 day moving averages. The market has tended to spend as little time as possible in this range (June-July 2012 period the most recent notable exception). Not surprisingly, then, we have moved higher with aplomb, building on the near term trend originating from last Wednesday, and crossed the gulf very quickly.
We’re now within a hair’s breadth of the 125 day, coming in at 1946, which may present the S&P with a good place to take a break after such a sharp snap back from the lows. For the Bulls, its will be yet another test of the strength of the bounce. For the Bears, it represents the last best hope for a stall out and retest of last weeks lows.
Price behavior around the 1946-1950 level will give us clues as to how to position for the rest of the week. At this point, if you’re short, take a break above this level as a signal to cover, with an eye towards a retest of the 200 day if we fail and move lower from there. If you’re long, take note of any weakness over the next few days, and be ready to take profits if we fail at this critical level. I personally favor the long side, and if we move decisively above 1950, the odds are good that we retest the September highs.