Last week I mentioned that the divergence between the indexes was telling us it was a fractured market environment. It could have fixed itself with the Dow joining the other indexes and making new highs, but until it did, it was not a healthy bull move. That index divergence resolved itself to the downside last week.
When looking at Woody Dorsey’s longer term sentiment data, it is at levels where a major turn could hit and a bear market could start. But for something like that to happen, the psychology of investors would have to change. That is the piece that has not happened yet and why this pull back will most likely be just that-a pull back.
The lack of volume or panic buying at the highs, is suggesting that we made an exhaustion top and not a major top. Of course, nobody can be 100% sure of anything that far out and honestly, focusing on when this drop could end and where, is more important than whether or not we made a major top or not.
Timewise, Woody was forecasting a drop that could last between 3-4 months. That brings us into the March-April time period for an intermediate term low to hit. Price wise, I think a move down to the 1577 or even 1450/1403 would not be a stretch. That is the 23% and 38% support levels and should shake out a lot of complacency we have seen in this market.
Assuming a larger drop has started, is still carrying some risk. Until the SPX breaks through the 1675ish trend line, no real technical damage has been made. If it does break, expect some panic selling and a quick move down to the targets mentioned above.
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Related Reading
Has the 2009 Stock Market Bull Topped Out by Ed Carlson
