Is The S&P 500 Correction Underway?

By Jim Donnelly, Olson Global Markets

After failing to break above key channel-top resistance at 1,850.84 on January 15, the S&P 500 Index (SPX) has fallen by 60.55 points through the close of Friday. That decline represents a modest 3.27% setback thus far but feels worse because of its abruptness. Technically, one key problem is that overbought conditions on weekly charts remain in place along with the fear that troublesome economic conditions in China, South America and Europe could dampen growth expectations in the U.S.

While the current 3.27% pullback in the SPX is relatively mild, further declines in the equity markets could nevertheless test investor confidence. A solid break below trend line support at 1,757, for example, would be another negative that could raise the angst of the bulls particularly since a number of recent earnings reports have revealed lackluster top line revenue results. That being said, there are a number of economists who have upped their Q4 2013 GPD estimates which, in turn, suggests that fears of a slowdown in domestic economic growth might be overblown.

Still, a solid break below 1,757 could give buyers reason to pause and wait for prices to fall to more attractive levels. Interestingly, the next key support to focus on (below 1,757) sits at 1,573, but rises over time. If reached, that level would represent at 15% decline from the January 15 high and could be just enough to whet the appetite of investors who did not participate fully during the surge of 2013.


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