Friday, March 20, 2009

Retracements

We may be seeing the start of a multi day pullback. The 50 MA on the S&P has held strong as resistance so far. Generally when a stock gets overbought and reaches resistance you see 1 of 2 corrections.

1. Price Correction - Prices retrace part of the prior move as the market absorbs the supply (sellers) entering the market at resistance. Generally this will occur when there is a disequilibrium between buyers and sellers (more selling pressure than buying). Whereas deep retracements signal more of a weak market, shallow retracements signal a stronger market. Think of it this way: Deep retracements are a result of a lot of selling pressure and an absence of significant buying - The bulls are allowing the market to drop significantly before they step up to the plate and start buying to put a bottom in the stock. Conversely, shallow retracements occur when the bulls step up to the plate quicker, thus causing the stock to form a small retracement before bottoming. These shallow retracements help convey more of an underlying bullish tone with market participants.


Deep Corrections (retracements) = weak market


Shallow Corrections (retracements) = strong market

2. Time Correction - Prices begin to consolidate at resistance as the market absorbs the supply entering the market at resistance. Generally this will occur when there is an equilibrium between buyers and sellers. With a time correction, the stock generally doesn't retrace much, if any, of it's prior move. Thus, it could be said that time corrections are generally more bullish (or bearish if in a downtrend) than price corrections.




To find likely areas of support on the S&P 500 we could draw a fib retracement over the last upswing (664 - 803). The 38.2% retrace resides around 750, 61.8% retracement is at 718. I'll be watching this zone on this pullback for potential support. It will be interesting to see how deep of a retracement we get...
Tyler -

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