After more than nine months of robust stock market gains, it is reasonable to expect corrections. Stock market corrections tend to come out of nowhere, and traders are surprised when it happens. However, corrections are common occurrences that help alleviate overbought market conditions, preventing speculation from escalating into stock market bubbles.
Here is the good news. The S&P 500 Index (SPX – 4,688.67) still retains its primary uptrend channel from its bottom at 3,723.34 (3/4/21). The 8-month uptrend channel suggests an SPX target near 4,761 (top of the uptrend channel), and above this to 4,813 (10/22/21 breakout projection). The market corrections that occurred this year have given traders and investors many opportunities to purchase stocks at discounts. For instance, during 2021, the SPX Index has experienced five (5) such corrections. The magnitude of the declines has been -3.27% to -5.87%, spanning from three (3) trading days to twenty-one (21) trading days. The average of the five corrections is 4.56%. See the attached chart of the SPX Index for further information.
Here is the bad news. From 3/4/21 to 11/5/21, SPX has rallied 995.16 points or 26.73%. From the 10/4/21 low (4,28.94) to the all-time high on 11/5/21 (4,718.50), SPX has also appreciated 439.56 points or 10.27% in 24-trading days. Looking at the MACD price momentum and the RSI overbought/oversold indicators, SPX appears to be overbought, at least from a near-term perspective. The ADX and +DI/-DI technical trend indicators remain healthy, suggesting the dominant trend remains in an uptrend. As mentioned before, corrections are common occurrences when investing. Nonetheless, with options expiration at the end of the week, a pickup in market volatility is possible.
Forecasting a market correction is challenging. Predicting the extent of the correction is as difficult. It does not help that the stock market is trading at record highs and high valuations. Also, there has been an increased number of stock market pundits predicting a stock market collapse. For instance, in the last few months, there have been numerous calls for a deep market setback due to higher inflation, federal government default on its debt, and an increase in Covid-19 delta variant cases. So far, the worse correction has been -5.75% from 2/16/21 to 3/4/21 and the -5.87% from 9/2/21-10/4/21.
With less than one-and-half months before the end of the year, another 3-5% correction can occur. However, to trigger a much deeper and more extensive correction, SPX must violate critical technical supports.
Below is a summary of the technical support levels for the SPX Index.
S&P 500 Index (SPX – 4,688.67)
Support 1 = 4,610-4,631 (11/10/21 low and internal trendline) = -108.5 or -2.30%
Support 2 = 4,546-4,551 (10/22/21 breakout and 38.2% retracement) = -172.65 or -3.66%
Support 3 = 4,499-4,502 (50% retracement and 50-day ma) = -219.5 or -4.65%
Support 4 = 4,409-4,447 (61.8% retracement and bottom of channel) = -309.5 or-6.56%
Support 5 = 4,266-4,279 (10/4/21 low and 200-day ma) = - 452.5 or -9.59%