Imo the inevitable correction is nigh as there are so many articles to that effect on Yahoo Finance, MarketWatch, CNBC, Bloomberg, etc. Hence, the question is how to play it. My approach is to first look at the charts.
During the last 2 years two time periods have caught my eye.
The first is from 21-May to 13-Jun-2013, which is shown in the chart below.
Note the following points regarding the above 21-May to 13-Jun-2013 chart.
Pre correction the XJO was ~5200, and the intraday low was 4659, a fall of 541 points.
The total correction from 5200 to 4659 was 10.4%.
There was approximately 12 months of sustained growth leading up to the May 2013 correction.
Once the correction started there were two relatively large down days in succession.
After dropping approximately 4.4%, the XJO consolidated for a few days. Note that the short consolidation period mid correction roughly lined up with previous support/resistance levels as shown by the red horizontal line.
After consolidation, further steep declines.
Correction all but over after a 10% drop.
Does not continue down to become a bear market.
The second period of interest is from 21-May to 4-Jun-2012, which is shown in the chart below.
Note the following points regarding the above 3-May to 4-Jun-2012 chart.
Pre correction the XJO was ~4450, and the low was 3985 on 4-Jun-2012, a fall of 465 points.
The total correction from 4450 to 3985 was again 10.4%.
Once the correction started there were two relatively large down days in succession.
After dropping approximately 3.6%, the XJO consolidated for a few days. Note again that the short consolidation period mid correction roughly lined up with previous support/resistance levels as shown by the red horizontal line.
After consolidation, further steep declines.
Correction all but over after a 10% drop.
Does not continue down to become a bear market.
The present day XJO chart is shown below.
Note the following points regarding the present situation, which includes my rough strategy.
If the business news and charts, the SP500 chart in particular, are such that a correction is perhaps imminent, then I would short the spikes, but not buy the dips. Imo this is where the market is sitting at the moment, and this is what I am endeavouring to do.
Starting point = 5500 roughly.
There has been approximately 12 months of sustained growth from June 2013 to the present.
Before the correction has its first big down day I would keep stops loose.
Once the correction starts I expect that there will be 2 or 3 relatively large down days in succession. Imo if I don’t get short trades set before the big move, I will probably miss the move down altogether.
After each big down day I would move stops down to midway within the days move in preparation for the next day.
There is support/resistance at roughly 5300, which is 3.6% below 5500. Hence, perhaps the XJO will consolidate for a few days around this level. Imo this is the time when a trader needs to decide if the present decline is a dip or a correction. Note that the generally accepted definition of a correction is 10% or more, anything less is a dip.
If I decide that it is a dip only, then I will tighten stops. However, if I decide it is a correction, then I will keep the stops loose.
After consolidation, I expect further steep declines. Once again, after each big down day I would move stops down to midway within the days move in preparation for the next day.
A 10% move down from 5500 is 4950. Hence, when the XJO gets down to this level, then imo this is the time when a trader needs to decide if the present decline is a correction or whether the XJO will drop further to become a bear market. Note that the generally accepted definition of a bear market is 20% or more, anything between 10% and 20% is a correction.
When the XJO reaches 4950, then if I decide that it is a correction only, I will tighten stops. However, if I decide the XJO could continue lower to become a bear market, then I will keep the stops loose.
Note that the support back in June 2013 is at 4640, which is only about 16% below 5500. However, the support back in June 2012 is at 4000, which is about 27% below 5500.
