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A Few Reasons Why The S&P Should Correct In The Near Term

October 11, 2010 Leave a comment Go to comments

U.S. equity indices look poised for a correction in the coming days. Why?

1. Bearish rising wedge forming over the past three weeks. This pattern, if triggered by a violation of the underside trend-line, points to a 35-40 point correction the ES in the near term.

2. Momentum and sentiment has reached a point of extreme, warranting corrective behavior before attempting to validate the recent upward trend.

3. Financials lagging, and badly. The SPX is up ~2% since September 20th, while the XLF (S&P Sel Financial Spdr Fund) is down ~2% during the same period. In a post from last week I postulated that the market could go through a series of sector rotations, which would help keep equities bouyed through the end of the year, but the glaring divergence between the health of the financial sector and the S&P looks like it needs to be tested first.

4. The Dollar looks ready to work off oversold conditions, and it's no secret that the relationship between the FX markets and equities is one which needs to be closely monitored. Even the carry trade de jour, the Australian Dollar (AUDUSD) after briefly breaching 2008 highs, is due for a pullback.  In the short-term, the 'risk-off' trade should be in play.

 

Here is a graph of the rising wedge pattern in the ES contract.  Should this pattern break, then a move towards the 1122-1127 area should be expected, where the summer range was penetrated back during the 3rd week of September.

Es rising wedge

 

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