"The equity market is technically oversold right now and is due for a near-term bounce, but that would be a rally that I would fade if we see it. There has been too much of a rupture to ignore with the S&P 500, Dow and Nasdaq all closing below their 200-day moving averages (fist time in almost a year for the Nasdaq). There were only 11 new highs yesterday and 212 new lows, so this ratio is still quite bleak. Decliners/advancers were also 11-to-1 on the major exchanges. This is what I mean by rupture.
On average, corrections that take place after such a massive move up from a depressed low is 20%, which would mean that we could expect to see the S&P 500 still test the 970 level; with a prospect of a second-order Fibonacci retracement implying a move below 950. Remember that before the last big leg up in the market last summer, the S&P 500 was hovering around the 920 level, which is my target to begin getting interested again.
A 10% correction, even in a bull market, is pretty normal, and historically has occurred about every 12 months — and tends to occur more in the second year of a rebound, or bull market, than in year-one. So the European debt crisis is certainly the catalyst for this renewed round of risk aversion, but is not out of line with market patterns over the past century.
Two critical data points to watch for — the May 6 flash-crash intraday low of 1,065 on the S&P 500, followed by the 1,044.5 low on February 5. If these don’t hold, and the bulls need these levels to hold, then another leg down to or through the 950-970 levels is likely."
Source: David Rosenberg, Gluskin Sheff
Related: SPDR S&P 500 ETF (Public, NYSE:SPY), ProShares UltraShort S&P500 (ETF) (Public, NYSE:SDS), PowerShares QQQ Trust, Series 1 (ETF) (Public, NASDAQ:QQQQ)
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