Technical Analysis of Financial Markets

Sunday, March 04, 2007

10% Correction ?

In a period of just 7 months from 18 July 2006 to 20 February 2007, the Dow staged a powerful rally achieving a gain of 20% in that period; so a correction of some sort was overdue and expected. A drop of 10% is considered a full-fledged correction, which is an interruption of a general healthy bull market trend. If a 10% correction is on the cards, then the Dow is currently half-way through. A further drop of around 600 points from current levels towards 11500 will mark a 10% correction for Dow coinciding with the 61.8% Fibonacci retracement level of the 7-month rally.

Across the Atlantic, the situation seems more threatening. A 10% correction for the FTSE 100 will take the UK’s blue-chip index of the 100 largest companies towards 5800 which would clearly break the 4-year bull market uptrend support. A broken trendline of this nature would indicate a bearish trend-reversal where the uptrend “support becomes resistance”.

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