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Stocks hit the top of the channel again; a 5% correction would be business as usual here
12/02/2009 6:55 pm EST
For all the ups and downs; the crisis scares and the crisis solutions; the good numbers and the bad numbers; this stock market is still moving up.
But instead of running up by leaps and bounds, it’s now inching up. Each time it rallies it manages to push the top of the range up just a few points before it sinks toward the bottom of the range where it sets a slightly higher low.
Let me show you what I mean on the Standard & Poor’s 500 Stock Index.
On September 16, the index hit a temporary high at 1069 and then fell back to 1025 on October 2.
On October 19 the index managed to climb to 1098 and then fell back to 1036.
On November 16 the index made a new high at 1109. And it matched that high today at 1109.24. If the pattern holds investors should expect the index to now move from the top of the channel toward the bottom at, roughly, 1070.
That would continue the pattern of higher highs and lower lows, indeed. But stocks are only making these gains after a battle. We’re talking about a move of just 45 points on the low side and 41 points on the high end since September 16.
(You can draw your own channel lines using the charting tools at Stockcharts.com or as use the chartgs on the site of my partner MSN Money. I’ve used a technical analysis tool called Bollinger Bands to define the channel. John Bollinger, the inventor of Bollinger Bands has his own website that explains his tool at http://www.bollingerbands.com/ )
It’s not just the S&P 500 that’s following this pattern. You can see it in the Dow Jones Industrial Average since August as well. The Dow Industrials, like the S&P 500, looks like it may have stalled again at the top of its channel today.
What does all this mean to you? (Me. Me. Me. It’s always Me, isn’t it?)
I think the odds are pretty good that we’ll now see a minor reversal that would consolidate recent gains. And set the stage for another attack on a slightly higher high at the top of the channel.
In other words, if we get a move back to something like 1070 on the S&P or 10,006 on the Dow it doesn’t mark the beginning of some big change in the market and you don’t need to panic and head for the hills. (Although it does mean, if you have something to sell you should do it now or be prepared to wait for the next top in the channel. And, of course, by at the bottom of the channel, if you get a chance.)
That kind of decline is just business as usual. It would be a drop of 3.6% on the S&P 500 and 4.3% on the Dow Industrials. Exactly the kind of mini-correction (5% and not the standard 10% correction) that we’ve had in this rally.
If the market goes down through those levels, like a hot knife through butter, then we’d be looking at a very different scenario, of course. But, as I’ll explain on Friday I don’t expect that to be a real danger until March or April of 2010.
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