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Consolidation, Correction, Deep Correction, or Bear Decline?

As the stock market indexes recorded new all-time highs this year, it is realistic to question the next stock market pullback and how much is the decline? After all, stocks do not go straight up forever. Instead, it is reasonable to expect a brief period of sideways trading or corrective actions before the primary trend resumes. But 2021 has been unusual, as the stock market rally has been the exception to the norm.


Over the past four trading days, the SPX Index (SPX) has finally succumbed to selling pressure as it has quickly declined 160.55 points or -3.65%. It appears the recent pullback falls within the guidelines of consolidation (3-5% decline). So, will SPX find support here and resume its primary uptrend? Or will SPX enter a correction (5-10%), a deep correction (10-20%), or even a bear decline (20% plus)?


Below are three different SPX charts, each with various timeframes and technical supports. The supports correspond closely with the respective Fibonacci retracements (38.2%, 50%, and 61.8%), trendlines, prior breakouts, reaction lows, and moving averages.


So, which of the three charts convey the best support zones for SPX?


Chart 1 shows SPX currently testing crucial support at 4,225.28, coinciding with the 50% retracement from May-Jul 2021 rally. The ability to maintain support hints at a potential near-term bottom. Additional pivotal support is also visible at 4,164-4,185.5, coinciding with the 61.8% retracement and the Jun 2021 reaction lows.


Chart 2 shows SPX challenging the key initial support at 4,240, corresponding to the 50-day ma, Jun 2021 breakout (4,238-4,257) and the bottom of its Oct 2020 uptrend channel (4,276). The ability to find support here also hints at consolidation. Violation here warns of the start of a 5-10% correction toward the 38.2% retracement at 3,951. Below this signals a deep correction or a 13-16% decline to the 50-61.8% retracement at 3,677-3,814.


Chart 3 shows an SPX chart dating back to the Mar 2020 market bottom (2,191.86). Given the extent of the Mar 2020-Jul 2021 rally or +2,201.82 (+100.45%), SPX is overbought and due for a pullback. The current decline is at a critical phase, as it tests the 50-day ma (4,240.31). Failure to maintain support can lead to SPX falling toward 3,895-3,981 or the early-Apr 2021 breakout and the 200-day ma.



Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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