Correction Territory

Don’t look now but the BigFoot Database is turning bearish.

Both the S&P500 and Nasdaq flipped sell signals in the last few days. Only the DJIA still shows a buy.

There’s been a 25% reduction in the number of long positions for the BigFoot database, as the system has silently declined from close to 85% long down to barely over 64% long today.

Compound all of this with the lousy open futures are indicating, and it’s a recipe for the major indexes to slip into correction territory this week.

This will officially ‘break’ the August trend the markets have been enjoying. In fact, several of the big tech names that lead the markets higher in the last rally are entering bear market territory.

While the fear for many is that the economy is going to break down (as we still see many supply chains broken), this is a premature call. In healthy markets, pull-backs are normal. It’s common for traders to sell off profitable positions and ‘rotate’ into other asset classes.

In periods of rotation, markets often pull back to other to previous high levels before the most recent trend. If you’ve ever been on one of our forum calls, you’ve seen this discussed in the technical market review. “Wave overlap” is a common indicator market technicians look for. It is the point at the top of bottom of a prior trend reversed course. When the most recent trend changes, it’s common for markets to move back to a prior high or low in order to ‘test’ buyers to see if those price levels will hold.

With election anxieties climbing, it is not surprising the markets are taking a breather and giving back some gains. The better question is, will this be the start of a the next bear market? Or are markets simply experiencing asset rotation?

This week will be a valuable data point. It will be the fourth week since the S&P 500 peaked and began its pull-back. It is also noteworthy that the downside projections alight with multiple prior wave peaks.

The extreme for the week is down near 3200. That’s a decline of about 3.5 percent; no fun, but survivable. That is also just a shade below the 10% retracement level, which would make the move an official correction.

Perhaps it’s a healthy move for markets. However, it’s a fairly extreme move. What the last several months have shown is that these markets can move in aggressive fashion. The declines in March happened in just a few weeks. So when it goes, it goes quickly.

And a four-week correction would be pretty quick. In fact, the SPX is already looking over-sold going into this week. So, while an outside possibility, there is still potential that some will ‘buy the dip’ at this point. Many of the large tech companies — the same companies that were viewed as the safe havens in the last pull-back — are trading at prices not seen since July.

So this week stands to be important in the analysis picture. To buy the dip or not? Given the nature of Washington, it may simply be that markets move sideways for the next several weeks. If markets find a foothold here, it sets up a sideways and somewhat range-bound scenario between now and the election.

Here are the critical numbers for the week:

Support: 3265 / 3218 / 3204

Resistance: 3343 / 3393

Odds are pretty good that things don’t melt down further from here… no guarantees of course. But there is a lot of support over 3200. A failure there and we’ll have more to discuss.

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