A rule of thumb about trendline, support/resistance, and moving average breaks
is to discount a single-day's such Close. For example, with a Close below a long-standing up trendline but a next day's rebound keeps the trendline 'intact'.
Another question I'm getting asked is on price targets for this current correction.
I never quite know whether to call this the 1-day rule or the '2-day rule'. The 1-day term relates to when ONLY a single-day Close (or an intraday low/high) violates some support or resistance; or, a dominant up/down trendline; or, a key moving average.
I tend to not trust just one day's price action, especially when it comes to sell offs which often pierce support areas only to rebound the next day. There's a well-known tendency for declines to 'overshoot' or cut through long-standing up trendlines because of how much selling is unleashed when an important trendline or prior low is penetrated.
Selling during significant corrections tends to be a lot at once. The tail end of such declines might see a Close below a long-standing up trendline, only to see the stock or index turn around and pop back up above the trendline the next day.
I could as easily call the 1-day rule a '2-day' rule of thumb in that I normally want to see if there's a second consecutive Close or intraday penetration that violates important support/resistance levels.
In the case of market action, as highlighted above THROUGH Thursday 10/18 (only) with the S&P 500 (SPX), it seems that the bulls were back in control based on having 'held' some key technical support(s) if looked at over TWO days.
While the downside may have been limited on the initial decline in what was the strongest Market segment (the S&P) in the recent cycle, there's still the matter of course of 'proving' that the bulls could not only stem the initial sell off, but ALSO push SPX up through technical resistance.
My next chart moves us forward to today's Close (10/24/12) where we see of course the RALLY FAILURE at the key line of technical resistance in SPX.
BEARS IN CONTROL!
The downside penetration of the long-standing up trendline and the important 50-day moving average ran two consecutive days initially. Those who adopted bearish strategies at the last rally failure in SPX (at the down trendline) saw a 'confirmation' or expectation of more downside to come given the break of technical support that went on into a second trading day. And of course, we're seen two added days of weakness since then. [Also, the 50-day moving average and the previously pierced up trendline have now 'become' key near resistances.]
Back when SPX was for a third time unable to penetrate the line of resistance highlighted in the chart above, you could turn to the tech heavy Nasdaq Composite (COMP) to see what IT was doing; especially to confirm or not confirm if COMP was also showing signs of a rally failure in the same way as SPX or in a different manner. With COMP the most notable bearish warning was that the Index failed at resistance implied by the important 21 and 50-day moving averages per my next chart.
THE MOST COMMON DOWNSIDE CORRECTION PATTERN:
With Intel Corp (INTC), an important Nasdaq bellwether stock, I've highlighted the most common corrective downside pattern, that of a down-up-down or 'a-b-c' wave pattern. A wave being an identifiable segment of an up or down move; here, the minor moves that end at a, b and c are price swings that are part of an overall down-up-down or a-b-c corrective decline.
MOST of the time, the second ('c' wave) decline is LONGER than the first ('a' segment) decline. This second decline often stands in a fibonacci relationship to the first; e.g., this decline ends up being 1.38, 1.5, 1.618 or 2 times MORE than the first downswing. Quite common is that down leg 'c' is 1.5 to 1.6 times greater that down leg 'a'.
ESTIMATING POSSIBLE NASDAQ COMPOSITE DOWNSIDE TARGETS
AND, a MORE UNUSUAL a-b-c-d-e downside pattern:
What has to date unfolded with the major market indices, including the S&P and Nasdaq is the rarer "a-b-c-d-e" pattern; similar to the a-b-c (down-up-down) only with a couple more segments tacked on, making for a down-up-down-up-down wave pattern. Ok, that's a mouthful.
As to how far the decline might carry, I take the distance traveled by the 'b' to 'e' decline and see how much greater that price swing is relative to the initial sell off. A speculation I have highlighted on the chart is that a pullback to 2940 is a possible objective based on the end of the 'e' downswing being twice that of the initial ('a') decline.
Another important way to estimate potential downside price targets is to look at what price level is reached at the Fibonacci 50% and 61.8% (sometimes 66%) retracements of the last major upswing that of the JUNE to SEPT advance. The June low is off the chart to the left and not shown, at 2726.
GOOD TRADING SUCCESS!