Technical Analysis of Financial Markets

Monday, June 12, 2006

10% Correction ?

The declines in the Russell 2000 index of smaller companies and the tech-weighted Nasdaq today have contributed to a 10% pullback from the year highs from each of the indices; a drop of 10% is considered a full-fledged correction, which is an interruption of a general bull market trend. The above chart of the S&P500 illustrates a close below the 200-day moving average and 1245 key support. The index has closed resting on an uptrend which has been providing support for the past 35 months. A close below this support provides a good entry for short positions as "old support becomes new resistance". Finally, if the S&P500 is following the Russell and Nasdaq into a 10% correction, the 38.2% Fibonacci retracement level at ~1190 from the year high should provide support.

The Dow, if too, is following the other major indices into a 10% correction, should find support at approx 10,550 where it meets the uptrend support which has been intact over the past 35 months since July 2003:

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