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A nearly 20% correction


 

normally goes through an inverted head and shoulders pattern to regain a market correction.

We are currently in the left side of this pattern.

Previous corrections:

2000, approx 43% correction, lasted about 8 mos.

2008, approx 60% correction, lasted about 8 1/2 mos.

2010 April/May "correction", (occurred and stayed above 200 day MA), 17%, lasted about 20 weeks.

2011 Aug Correction, approx, 20%, has lasted about 5 weeks so far.

The theme and thesis is that the greater the correction, the longer it takes to rebuild.


 

on a longer term historic basis it's very possible to say our current state of affairs is relatively like the late 60's through the 70's and nothing like the 1990's.

The Depression of the 1930's for example was a correction of approx. 90% and lasted until nearly the end of WW II - making Paul Krugman's comment about a large scale project to get us out of this seem painfully long though our current correction is nothing like the Great Depression.

So how long could this current correction last? I'm going to say anywhere from 4-6 mos with a potential to retest and/or go lower if we abide by the inverted head and shoulders model. Using the 2010 April/May model for this pattern we saw an approx 9% bounce from the left shoulder bottom in June '10 follow by an approx. 10% correction to the head in the latter part of June.

So if we're currently working on the left shoulder to the neck - we're very close to the top of that 9-10% bounce up and would then look for another 9-10% to the downside giving us a bottom at about 1080 on the SPX. The ensuing right side of this inverted head and shoulders would or should bring us back to about the 1210 level around 5-6 weeks after the bottom. We should reach the bottom - the head - of the correction around Sept. 9 or so...and that would be a probable good entry point - say Monday Sept. 12.

 

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