The Coming Correction

01/10/11 02:05:11 PM

by Koos van der Merwe

So we know that a correction is due. How long will it last?

Security: DJI, SPX
Position: Sell

In my article last week, "The First Rule," I discussed how and why the wave count currently in force does not look like a major Wave III, and that it could be a Wave 1 of Wave III. In this article I want to discuss the time we can expect the correction to bottom, and how far it could fall.

FIGURE 1: DJIA, DAILY

Graphic provided by: AdvancedGET.

Figure 1 is a daily chart of the Dow Jones Industrial Average (DJIA) and show that a wave 5 could be in the process. I write "could," because when we look back at the relative strength index (RSI) signal, it suggests that the RSI could stay at overbought levels for a lengthy period before a sell signal is given. We could in fact see the DJIA climbing to test the upper trendline before selling off. Do note the dates suggested by the Gann fan, namely January 14, and February 7. These dates are suggesting turning points, should the DJIA fall. Do note the high that occurred on January 5.

FIGURE 2: S&P 500, DAILY

Graphic provided by: AdvancedGET.

Figure 2 is a daily chart of the Standard & Poor's 500 and shows how the index is in the sell zone as depicted by Gann projections. Here I have taken the 2x1 line of the Gann fan and drawn it from the high and low pivot points of the index. Note that the RSI has given more concise signals and could be suggesting a divergence sell signal. The dates suggested by the Gann fan are different from that of the dates given in Figure 1, by a matter of three days. Do note that the buy zone suggested by the Gann lines is within the fourth wave of lesser degree with its lowest level, on January 21 at 1216.07.

Both the DJIA and the S&P 500 are suggesting that a correction is now due, but a mild one, that could last until January 21 or February 4 with March 7 at the outside. If my wave count as stated in the previous article is correct, and that this current five-wave count is a Wave 1 of Wave III, then the correction presents an outstanding buying opportunity. I must mention that in listening to Fed chair Bernanke when he spoke recently, that although he is optimistic about the US economic recovery, he did play down his enthusiasm. He has probably learned that it is always better to err on the side of caution and downplay his success in the economic recovery. Last year at this time, Republicans and their henchmen were calling for a double-dip recession. Amazing how short memory can be.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.