Is a Correction Coming?

Katie Stockton, a technical analyst and founder of Fairlead Strategies, appeared on CNBC this past week to give her thoughts on the recent rally and what she believes may be to come.  Following the roughly 20% drop we saw from the market peak in 2018, down to the lows in late December, we have seen a strong upward move in equity prices across the board.

However, Katie says she is seeing signs of exhaustion in the market. In fact, she claims there has been a "bearish bias" to the recent rally from the onset and is expecting a 2-3 week pullback in prices. Even with a 16% since Christmas Eve, and the S&P sitting 7% from its all-time highs, many say it's not enough to bring the market out of its current downtrend. Some, like Jim Cramer, have blamed the Fed for the selloff in Q4 2018. Jim claims that Chairman Jerome Powell caused fear to enter the market due to his comments around "normalized rates". In late November, Jerome changed his tune on rates and claimed that the Fed would remain data dependent in regards to future changes. Personally, I am not sure any of the reasons as to why the market experienced a selloff are really that important. In fact, as technical analysts, we shouldn't be worried about what outside forces cause the market to move one way or the other.

Krishna Memani, CIO at OppenheimerFunds, also appeared on CNBC last week as well. He claims that a "short" pullback could keep the Fed from being too quick to make a decision on rates. Krishna also said that "If the market just keeps going up, then it brings the Fed back into play." Again, I am not personally a fan of those who hang on to every word that Jerome says, but to each their own. With that said, let's take a look at what a short- or intermediate-term correction (if we are being honest, "pullback" is not the correct term to use here) could potentially look like:

The blue arrows represent a short-lived throwback into the 2,600 level on the S&P 500, which has been the main focus of many analysts over the previous few months. A potentially larger throwback, more in the terms of the length Katie is expecting, is represented by the purple arrows. The blue arrows would theoretically see the market sell off for a couple weeks, ending in late February. The larger correction would see us break through the 2,600 area (closer to 2,500), and could last upwards of four weeks, before seeing a bullish reversal.

In my opinion, a lot of the talk around "how big or long the correction will be" is a little premature. However, I understand that many are on edge and feel that the current upward move simply can't keep going much longer. But it is just that mindset, that we are seeing from many participants, that tells me it could very well "just keep going" in the same direction. From a bearish perspective, I am somewhat concerned that the Daily RSI on the S&P 500 has not breached 70 since late August. On top of this, we have seen the same indicator fall below 30 twice (22.9 and 22.4, respectively) in the last few months. The last time the RSI fell below 30? Nearly a year ago. Before that, it was November 2016, right before the Presidential election. If RSI does indeed fail to reach 70, even with the incredibly strong move we have seen in the last six weeks, it would be a point in favor of the bears. With all this said, until we make a new high (above 2,820) or a new low (below 2,345), we are still range-bound and it's very difficult to predict what will happen next, let alone put a time frame on the expected move.