Relief. That's what I feel right now regarding the markets after the recent pullback (even as it continues). In fact, I feel better about the markets now than I did just a couple of weeks ago. Does that mean I think the worst is behind us and the market will continue hitting new highs? Absolutely not. The truth is, I don't know what's going to happen in the future any more than you do.
But here's what I do know. A market selloff was inevitable. And it wasn't so much a market selloff that had me concerned... it was the relentless climb of the market without so much as a hiccup. The S&P 500 went 400-some trading days since its last decline of 5% or more -- the longest such period in 20 years. And the market's 4.1% plunge on Monday, February 5, was the biggest one-day drop since 2011.
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The persistent gains the market displayed leading up to this volatility was historic. But with each new record high, my anticipation for a pullback or correction grew. It's like watching a record performance by an NBA player making 3-pointer after 3-pointer. At some point, he's going to miss. But until that point, with each ball he tosses up, you wonder, "Is this going to be the one that ends the streak?" Once he does miss, we can move on. We can reset.
Is this pullback a "reset"? Will the market resume its upward momentum, or will it decline further? Again, I don't know the answer to that. But let's look at some technical indicators, which can help prepare and perhaps give us some clues about what to expect to the upside and downside.
What The Technicals Say
First, the dip in the S&P 500 is little more than a retracement to the 100-day moving average (blue line). However, yesterday's selloff broke through the 100-day moving average (and the long-term bullish trend line (black dotted line), which indicates further downside, perhaps a test of the 200-day moving average (red line).
We could see a short reprieve as the market is now in oversold territory according to the relative strength index (RSI). As a refresher, when looking at RSI "oversold" is under 30 and "overbought" is over 70. That means we could see trading in February clawing its way back toward that 2,850 level. If the market rallies back and sets a new closing high, that's a confirmation that the bullish trend is still intact.
Then there's the proverbial flip side. The momentum indicator in the top chart signaled a "sell." So if the market fails to break out into new highs, we could see a test of the 200-day moving average (red line) support. That would put the S&P 500 around the 2,550 level, which would equate to a 13% decline from the recent high. A decline of 13%, which would certainly get a lot of attention, is still within the context of a "normal and healthy" market correction.
It's likely that over the next couple of weeks we will see the market struggle to find its footing before it decides whether to head north or head south.
Right now, all we can do is patiently watch to see it does next. I will continue to keep an eye on my stops, and, of course, I'll be taking my cues from what the Maximum Profit system tells me.
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This article originally appeared on StreetAuthority.com.