What a lovely correction! Â
As noted in our Weekend Trade Reviews, we saw this dip coming from a mile away and, from the outset, we were never expecting more than 10% at most. Â We’re not even close to 10% so far but is it already time to fish the bottom or should we maintain a “Cashy and Cautious” stance? Â Thankfully we have the 5% Rule™ for that sort of thing:
The Dow consolidated around 15,000 in the middle of last year and then we had an explosive run up to 16,500 (non-spike) for a very exact 10% move up since Thanksgiving, call it 2 months.  Now, in 5 days, we have a drop back to 16,000, which is an also perfect 50% retrace of the drop and it came so fast we had a 20% overshoot – also predicted by the 5% Rule™. Â
So, call the fall 16,500 to 16,000 and we’ll look for a 20% weak bounce to 16,100 and a 40% strong bounce to 16,200 by the end of the week. Â
BUT, this morning, in our Member Chat Room, we took into account some other factors such as the Dollar, wind speed, the type of swallow and the kind of coconut it’s carrying – and we came up with the following lines we need to see broken today (weak) and tomorrow (strong) in order to flip bullish on this market again:
- Dow 15,940 (weak) and 16,080 (strong)
- S&P 1,802 (weak) and 1,814 (strong)
- Nas 4,145 (weak) and 4,165 (strong)Â
- NYSE 10,080 (weak) and 10,160 (strong)
- Russell 1,146 (weak) and 1,152 (strong). Â
That’s all it will take to impress us – not even a 50% retrace of the drop.  We need a weak bounce by today’s end and then a strong bounce (has to hold) by tomorrow’s and we can be believers but, for now, we’re mostly going to watch and wait and, so far, our waiting has paid off as we certainly have better deals out there than we had before. Â
As you can see from Dave Fry’s XRT charts (above), retail took the 10% dive we’ve been playing for and now it’s up to earnings to let us know whether we’ve got further to fall or not.  With several hundred companies reporting this week – I think we’ll have a good fact base to trade off. Â
