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Morning Matters:

Using The Retracement Tool To Gauge Where the Markets are Going
by Geoff Garbacz

Many are becoming alarmed at the selling over the past two weeks. The S&P 500 hit 1150 on Tuesday, Janaury 19th. Now the S&P 500 is at 1163.11. This is a drop of 86.89 points or 7.56%. The calls are coming in for a 10%, 15% or even 20% correction. How valid are these claims?

We like to use the retracement tool in Erlanger Chart Room to assess the damage. Retracement looks at a low to a high or a high to a low and then draw a retracment line that provides 38.2%, 50% and 61.8% retracements of the high to low or low to high.

First we will look at the November low to the high on January 19th. So far all retracements have been broken. Therefore, it is key to move above the 61.8% retracement which is 1075.54. The longer it stays below this level the greater the chance it moves all the way back to the November low.

An approach we like to look at is other pullbacks within the current bigger trend. This trend began in March and is an uptrend. There have been two pretty scary pullback. First, the June/July pullback. Like this pullback, the 61.8% retracement was broken and it took three days to hold this level and then start to recover.

The second pullback that tested the conviction of the bulls was the October pullback. Again the 61.8% retracement was broken for one day before starting a new rally.

This move is different because unlike June/July or October the 61.8% level has been broken twice. A test await today as the monthly job's numbers are due out shortly and can either help or hurt the rebound.

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