Is a Correction Underway?

Historical odds still favor that the S&P 500 should visit the 911 level -- or lower -- soon

By Paul Cherney

Note: Paul Cherney will be out of the office on Tuesday, May 20. His column will return on Wednesday, May 21.

Chances are good that we are seeing the beginning of a correction which could unfold over several more trading days maybe as many as four, or until downside price prints of 910 or lower for the S&P 500 unfold. That doesn't mean every single day produces a negative close. Based on NYSE volume and NYSE TRIN (an index combining both advance/decline and up-volume/down-volume indicators) readings intraday on Monday, odds are about 6 in 10 that by the close of the session on Tuesday, there could be a plus sign in front of the daily change in the S&P 500. But the historical odds still favor that the S&P 500 should visit 911 or lower soon.

The VIX (market volatility index) has moved above its 10-day exponential moving average. Near Monday's close, the 10-day exponential moving average of the VIX was 22.48. Usually, when the VIX crosses back above its 10-day exponential moving average, equity prices suffer. That was the case on Monday. But now, a move back below the 10-day exponential can coincide with a lift in prices.

The S&P 500 has a layer of support at 920-911. The end of day charts clearly show substantial support at 910-862. Because of the stairsteps of support, there are probably going to be buyers coming into this with prints of 920-918 and lower as bears cover shorts and intraday traders take a shot at the long side.

Immediate support for the Nasdaq is 1504-1489. If the index prints below 1486.91 for more than four minutes, the next layer of support is 1478-1451, with thick support at 1471-1461. For Tuesday, if the Nasdaq prints below 1486 and then then rebounds to print above 1489, there is probably a bounce in place and upside would open for a test of the 1507-1519.00 area of resistance.

Since 1987, when the percentage of "bearish" advisers in Investor's Intelligence weekly poll (%Bears) is less than 25.1%, the odds have been that 64% of the time, the S&P 500 has experienced a close which represented a loss of over 2% from the day that the %bears moved under 25.1% was announced. If you averaged all the worst closes experienced during the prior 14 occasions, the average worst closing loss was a loss of 2.35%; for the current S&P 500 that would equate to a close of 907.77. History never repeats exactly, but this is a consideration.

The Nasdaq has immediate resistance at 1507-1519.00, then substantial resistance at 1543-1595, with a focus of resistance 1547-1568.

The S&P 500 has immediate resistance at 929-939 and substantial resistance at 944-965, with a focus of resistance 951-957.

Cherney is chief market analyst for Standard & Poor's

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