Major Correction or Bear Trap?

February 26th, 2013

by Dominic Cimino

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

There are presently many analysts and commentators warning about an imminent market top and the potential for a significant correction. Numerous potential stumbling blocks stand ready to inhibit any further market gains, and according to the Bespoke Investment Group, this current S&P 500 rally is the 10th longest in days without a 10% market correction. Yesterday's big sell-off could be the beginning of a large correction. But maybe it has set the foundation for a bear trap instead.

In regard to the long streak referenced, Bespoke also mentioned in their study that the longest streak on record was 2,553 days, and the ninth longest was 650 days. The current streak stands at 512 days. So how much longer can this streak continue?

I have no idea. Perhaps it's ending right now as the market moves lower from recent highs. But I do know two things:

  1. We will only know in retrospect if a significant correction is unfolding.
  2. Markets are still above support levels.

This first chart is the S&P 500 Index. The major, minor, and minor-minor bullish trend channels are depicted as the parallel red lines of varying degree. The major one is widest, while the minor-minor is narrowest. Notice that the index still rests above the minor-minor trend channel support line – the index's first level of support.

Next are the Russell 2000 Index and the Dow Jones Transportation Average Index charts. Notice how the indices rest above their respective horizontal red lines, which represent previous all-time highs in each index and now offer support.

The analysts and commentators warning about a market peak could indeed be correct, and perhaps a major top is already in place. But they could be wrong as well, and the market could be presenting a bear trap for those shorting the market. If you watch the support levels I've mentioned, you may perhaps better gauge your sentiments on this issue. If support levels hold, or are only temporarily breached, it could be that the market moves higher and traps any bears that have shorted it. On the other hand, any true breaching of these support levels may indicate a significant correction is under way. My advice is you plug your ears and watch the charts.

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.

© 2013, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

Important Disclosures

Please be aware that this is not a recommendation to purchase or sell any security. This is not a recommendation for any individual or institution to alter their portfolio holdings. Every individual or institution has its own risk tolerance and investment objectives and perspectives.

Any above opinions of the author should be viewed as such. These opinions in no way represent any type of guarantee. Realize that if you choose to invest in securities, investing in securities carries with it uncertainty and the risk of loss of principal. Lost investment opportunity is also a possibility. Investing in securities carries no guarantees.

Past performance is no guarantee of future results. The price movements within capital markets cannot be guaranteed and always remain uncertain. The above opinions are meant to stimulate thought and should be viewed as such. You are encouraged to discuss these views with your representatives if you have any questions or concerns.

Any indices mentioned are unmanaged and cannot be invested in directly.

It must here be mentioned that technical analysis offers no guarantees of future price movements. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain.

Neither Cambridge Investment Research nor Preferred Planning Concepts is responsible for the accuracy of content provided by third parties. All material presented herein is believed to be reliable but we cannot attest to its accuracy.

All charts presented were made available by eSignal, a charting service available to individuals or professionals. Anyone interested in exploring the potentials of eSignal should give us a call.

Website by the Boston Web Company