It’s been a horrible month for stocks.
Since peaking in mid-February near 1,340, the S&P 500 shed 90 points – nearly 7% of its value – when it cratered to 1,250 last Thursday. Stocks gave up all their gains on the year and were threatening to cut into last year’s profits as well.
We can blame the correction on any number of reasons. There are political uprisings in the Middle East, North Africa, and Wisconsin. The Fed’s quantitative easing (QE2) program continually pumping dollars into the market is nearing an end. And of course, the earthquake, tsunami, and potential nuclear meltdown in Japan is enough to cause even the most stubborn bull to hit the “sell” button.
None of those factors, however, is the real reason for the market decline.[ad#Google Adsense]It’s Mom’s fault.
The Mother Indicator was right again. It’s the only indicator I know that has a perfect track record. So when Mom called me back on February 7 wanting to know what stocks she should buy, the Mother Indicator flashed a sell signal, and I knew it was definitely time to get out of the market. And I warned you as well. (Click here for an explanation of the “Mother Indicator.”)
Now look at what happened…
Stocks broke to the downside of the rising-wedge pattern (the blue lines on the chart) shortly after the Mother Indicator flashed a “sell” signal. Twice, the S&P 500 rallied back to retest the breakdown level (the red lines). Then it sliced through support at 1,300 and immediately dropped to the next support line at 1,250.
Friday’s bounce off support makes sense. Given the size of the wedge pattern, however, any bounce is likely to be short-lived. Stocks have more work to do on the downside.
You see, when stocks break down from a rising-wedge pattern, they’ll often retrace at least half the distance of the wedge. This wedge started with the S&P at 1050, and it peaked at 1,340. That’s 290 points… Half that is 145. If we drop 145 points from the peak at 1,340, that projects a decline down to at least 1,195 on the chart.
It doesn’t have to drop that far… though that’s the most likely scenario. There is support at 1,225 – which is likely close enough. Failing there, the support at 1,175 comes into play.
So, it’s not time yet to rush in and go nuts buying stocks. There are some bargains starting to appear, and a little selective nibbling is okay. Save the big bites, however, for a later date.
I’ll let you know when I think it’s time to buy – probably right after I talk to Mom.
Best regards and good trading,
— Jeff Clark[ad#jack p.s.]
Source: The Growth Stock Wire