I was reading the sensationalistic American media this morning calling the stock market's drop today as "Black Monday". First of all, this kind of correction has been expected since the S&P had been on a long uptrend since 2012. However, let's remove the sensationalism and examine the weekly SPY chart.
The weekly chart is what I refer to as the "bird's eye view" of which direction a particular stock is going. Every stock and commodity has a particular kind of visual motif and the SPY very much resembles ABA patterns in Beethoven's Symphonies. As one can see, currently the SPY is making a similar formation to Aug 2011, when there had been the unprecedented S&P downgrade if people remember. After a bit of voliatility, a strong bullish indicator occurred in Nov 2012, and since then we have been on a very strong uptrend.
In the last few months however, the SPY finally reached the 161.8% fibonacci retracement line- and has been hovering in that area, testing and re-testing that line, so a correction was to be expected. If the SPY holds the next support line at 181.31, then there is a strong possibility that within the next couple of months, a consolidation near 181.31 will give us the new direction for the SPY and I will be on the lookout for bullish signals. There is also a possibility that the SPY could consolidate lower at the secondary lowest weekly support line if it doesn't hold 181.31 but typically the SPY hasn't had multiple sell off days in a row, and generally is limited to the pattern it has established since 2010. I would be on the lookout for consolidation patterns, and wait to see any bullish indicators in the next couple of months.
Also as an Apple (AAPL) update to my previous post, as expected, it has made a correction and moved into the pullback area a little sooner than anticipated. I surmise that there is a strong possibility of consolidation near the 100% fib retracement line and the secondary support near 86.91-97.07. I would be on the lookout for a similar consolidation pattern from 2013 for the next several weeks. In any case, there should be a lot of volatility within the next couple of months.
I find that when people talk about the stock market on twitter- there is a tendency to panic, simply because although we are separated by geography, we are tuned into each other's thoughts via the interwebs, and Wall Street abides by groupthink. I find most financial reporting to be generally unreliable, minus a few exceptions, and twitter is a great place for people to catch people's first impressions, but most likely not for in-depth analysis.
The great thing about a correction is that it may also present a buying opportunity after consolidation, and looking for that bullish indicator can be kind of exciting, like anticipation of something one has always wanted. In any case, if there is any doubt, I always trust my own judgement, but I find visual information and visual analysis are always ahead of information given via macroanalysis, statistics and analysis of a stock via its highs and lows, moving averages and other data based on numbers alone. Also, I find most algos to be insufficient in determining the direction of a particular stock although many hedge firms may disagree with me.
In any case, taking a step back and not riding the wave of twitter and other social media is sometimes better for one's sanity, unless one prefers to be engulfed in the tidal wave, and I don't think I know of anyone who prefers pain over pleasure.
By Sierra Choi
DISCLAIMER: This analysis was for educational purposes only and not for any intended stock advice.