Have stocks moved from dip to consolidation already? And is the next move up?

11/04/2009 12:26 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

With the Federal Reserve set to speak on the economy and interest rates later today, November 4, and with potentially market-moving numbers on unemployment due out on November 5 and 6, it is certainly too early to say that the dip, correction, whatever, is over. The news in the next few days could certainly send investors back into worry mode and extend the losses of late October into early November.

But the stock market indexes are showing signs of moving from a potential correction to consolidation.

In a correction, stocks are in a definite and clear, if temporary and limited, downtrend. Stocks fall by 10% or so until they reach a level of support that often involves testing a former low. If that level holds, the correction has come to an end, at least temporarily.  (If stocks fall more than 10%, it's no longer a correction and we go looking for other terms.)

In a consolidation, in contrast, stocks have completed a move up or down and move sideways in a relatively narrow band. In effect stocks are setting the stage for the next move, up or down. This is called the consolidation phase.

A consolidation phase can last for quite a while as the market builds a base for a further advance or sets itself up to resume its decline.  In the consolidation the range is defined by recent highs and lows. It is a time of uncertainty as the market decides which way to go.

It looks like we might be in a consolidation now.


 The market has tested the early October lows--1025 on the Standard & Poor's 500 stock index on October 2--after hitting a high of 1098 on October 19. So far that low has held. Stocks got within striking distance of the October 2 low on October 30 at 1036. But since then the index has moved upwards and away from the low.

If the index had plunged through that October 2 low, we'd still be in the grips of a correction, and I'd be advising you to see if the September 2 low at 995 on the S&P 500 was going to hold.

In a consolidation it wouldn't be unusual to see the S&P 500 re-visit the neighborhood of that October 2 low at 1025 several times. With each successful test, the odds rise that the next move will be upwards in a resumption of the rally.

The price levels to watch in the next hours, days, and weeks are 1025, the October 2 low, and 1098 the October 19 high.

Any consolidation will end in a breakout through one of those levels.

I think the most likely breakout is upwards. In my opinion the larger trend still points up for the reasons that I laid out in my November 3 post "Why I think this is only a correction" http://jubakpicks.com/2009/11/03/why-i-think-this-is-only-a-correction/
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