Despite some recent improvements, unpredictability still reigns on Wall Street. So it’s best not to try and predict. Instead, simply watch the charts and react to what you see. In doing so, there are two important stock market numbers that could tell us whether the market correction is safely behind us or if we might be in for another extended dip.
The two stock market numbers that matter are these: 2,786 and 2,581.
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Those are the top and bottom, respectively, of the S&P 500 since this market correction began in earnest at the beginning of February. During the initial plunge, the S&P didn’t bounce back until it hit 2,581 on February 8. It then re-tested that support level on April 2 before chopping its way back above 2,700 by month’s end. At 2,716 as of this writing, it’s closer to the top of its post-correction range, but with a long way still to go.
The 2,786 top came on March 9, halfway through the current correction—and right before stocks came crashing back to earth again.
The ups and downs have slowed of late, as the market has actually settled into a pretty tame holding pattern for the last couple weeks. That kind of quiet is a nice change. As our Chloe Lutts Jensen noted in a recent column, the U.S. stock market has already had more one-day swings of at least 1% through the four-plus months of 2018 than it did in all of 2017. The CBOE Volatility Index (VIX), though trending downward, is still higher than it was most of last year.
So, even after a nice, steady earnings season-fueled run-up over the last six weeks, it’s still too early to proclaim with any certainty that the bulls have gained the upper hand for good. Typically, resistance and support levels narrow when stocks are caught in a trading range. Thus, any move above resistance at 2,786 would be a very good indication that the correction clouds may be parting.
It seems like we’re safely above 2,581 support, but if this basing period results in another break to the downside, it could come into play again. If the S&P somehow falls below that support level, then this correction could still have plenty of legs.
For now, however, stocks are essentially in limbo. Markets are trending in the right direction, but the lack of clear conviction is a bit unnerving.
What should you do? Listen to our analysts, who are striking an optimistic-yet-cautious tone, as I wrote yesterday. Our Mike Cintolo says the intermediate-term trend is now up, but needs to see an upmove soon to declare the February-through-May market correction over.
In the meantime, don’t stop looking for buying opportunities, while keeping at least some cash on the sidelines until the bounce-back hits a level that we can fully trust. To me, that level would be 2,786 in the S&P 500.
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