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Have stocks moved from dip to consolidation already? And is the next move up?
11/04/2009 12:26 pm EST
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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