Technically Speaking: How Big Could A Correction Be?

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.” – Dwight D. Eisenhower

“If we just stick together, and remain true to our ideals, we can be sure that America’s greatest days lie ahead.” – Ronald Reagan

Hope you had a great “Independence Day.” 

On Monday, the market was open for a half-day preceding the “Independence Day” holiday, and with the majority of the “human element” on vacation, the markets surged as the “robots” kicked in to “buy the recent dip.”

As I noted in this past weekend’s missive:

“As noted on Friday, the last couple of weeks have experienced a sharp rise in price volatility. While stocks have vacillated in a very tight 1.5% trading range since the beginning of June, there has been little forward progress to speak of. However, notice that support at 2416 has remained solid as ‘robots’ continue to execute their program of ‘buying the dips.’” 

Of course, the problem is what happens when these algorithms begin to reverse and “sell the rallies?”

That is the question I want to explore today which is simply: “how big of a correction is coming?”

For the purpose of this exercise, we will look at the S&P 500 Index as the proxy for the markets and use a Fibonacci retracement measure on a daily, weekly and monthly basis spanning various time frames in the market. The analysis will be run using, for each time frame, the most important previous support levels as the starting point.

A quick explanation on Fibonacci retracements in case you are unfamiliar from StockCharts.com:

“Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback.“