Minimum 5% Correction Begins

Conclusion: 1320 ties to March 6 and squares the 666 price low for a potential square out. The market has respected this level for two days and is gapping below 1320 this morning.

The pattern looks reminiscent of the November top, which was a grind up followed by a climatic spike.



Monday we saw a spike on the heels of a grinding move up.

The November high was at 1225. We tagged 1325 this week.

The November correction was between 4% and 5% and 152 points. I think another 4% to 5% correction is going to play out quickly into the anniversary of the March 6/9th 2009 low.

Fifty percent of the range from the November 1173 low to this week's 1325 high is 76 points. A decline to 50% of the last swing projects to 1249. There is some good DNA and symmetry there as this was the projection for the big inverse head-and-shoulders pattern from 2010. Moreover, 1248/1249 represents a 180-degree decline on the Square of 9 Chart.

Click here for square of nine chart.

A study of market history shows that corrections against the main trend are much more uniform while impulse legs in favor of the main trend can have a large degree of variability. Said in another way, it is easier to define and anticipate corrections not in favor of and against the primary trend that it is to judge the extent of the primary trend itself. In my experience, this is one of the most important lessons revealed in the study of stock market history.

Looking at the form of the advance from the September 1 kickoff, there are two legs separated by the November correction. Because of the persistence of the advance, which has seen no more than one 2% move in the last five months (compared to 14 moves of 2% or more in the preceding five-month period), the normal expectation would be to see a similar, uniform near-5% correction be bought with both hands by market participants. At the maximum I would expect the correction to extend to a backtest of the April/November 2010 highs of 1219/1227 respectively.

If the correction overbalances the November decline in time and price then the high was more significant.

If a uniform correction plays out it would give rise to a possible third drive up. Whether such a third drive into the anniversary of the April high if it plays out is a marginal new high or a significantly higher high remains to be seen.



Strategy: It looked like Elvis had left the building following the decline of January 28. However, after a genuine sell signal that players pounce on, there is often times a final squeeze. That may have been the run to 1320.

Fifty percent of the range from the 1275 low on January 28 to this week's 1325 high gives a midpoint of 1300. Any break of 1300, especially on the weekly closing basis (Friday) confirms a correction is underway from where I sit. This 1300 level ties to 1296, which is 6 X 6 X 6 X 6, resonating of the 666 price low. 1296 is in the upper right-hand corner of the Square of 9 Chart and aligns with May 6, the flash crash, so I would not underestimate how quickly a reversion to the mean in the persistency of the advance and a revulsion to sentiment could take place if everyone tried to get out of the door at the same time.



A Dow Theory non-confirmation has been ongoing for three and a half weeks now, which is long in the tooth while the market has been overbought for months -- a situation where the chickens could come home to roost violently and quickly, despite the fact that the market has proven to be a Shrine of Boys Crying Wolf.

It may be time to yell wolf.

Trading Lessons:



The following chart is mislabeled as FDX when it's actually FCX