More Reasons To Think This Is Just A Correction

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Includes: DIA, QQQ, SPY
by: ANG Traders

Summary

We revisit the state of the contrarian indicators.

We present new medium-term evidence on the Rydex that supports the correction scenario.

We emphasize probabilities rather than "Chicken Little" prophesies.

We have been saying for two weeks now that the balance of probabilities is not in favor of this being a bear market turn: there are 2.26 times as many bears as there are bulls, which demonstrates a high level of fear; the Rydex Bull Funds are at their lowest level since 2013; and this past week, the S&P 500 developed a long bullish tail.

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Last weekend, we stated that we expected some further deterioration in the market, but that at least a temporary rally was very likely. That is exactly what happened; a further downside extension in the first few days of the week, then a 100-point rally to produce a long tail (bullish) pattern.

We presented the long-term Rydex versus the S&P 500 relationship and highlighted the divergent pattern that develops before major bear market turns (see below).

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This week, we show that there was a short-term divergence preceding the 2011 correction, and that we again had a short-term divergence last year preceding the present downturn (see below). This further increases the probability that we are in a correction, not a major market turn.

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We continue to emphasize, however, that these are only probabilities, not prophesies. If our Price Modelling System turns long-term negative and the price action does not show some follow-through, then we will reassess. At the moment, we still see this as only a correction, and the continuing chorus from the "Chicken Little" crowd only increases our confidence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.