Great start of the year
The great start of the new year showed us that market optimism will stay with us in 2018. However, the rally was overdone, as prices went up too high too quickly. For this reason, a correction was needed. Among the current macro circumstances, the question is just where the market will give a forex signals buy opportunity?
As we mentioned in an earlier post the uptrend could continue in spite of the long bull market. Inflation is still muted in the US and Europe, so money – the fuel of stock markets – is still cheap. The growing economy and higher profits also justifies the rally. During the current earnings season 78 percent of the S&P 500 companies that have reported so far have beaten bottom-line expectations, while 80 percent have surpassed sales estimates. Until inflation ticks up or the growth of the real economy slows down stock prices will continue to go higher.
How far the current correction will go?
As we wrote earlier a 5% to 10% stock market correction would be normal and needed after the wild rally in January. Given that the S&P 500 index turned down at 2873 point it should bottom somewhere between 2590 and 2730. Meanwhile it closed near 2760 on Friday. On the top of that the market usually does not bottom on Fridays as the weekend normally stresses out stock owners and they want to get rid of their stocks on Monday. So, the correction is expected to continue in the first part of next week.
The market may bounce from these resistance levels
There are some strong resistance levels near 2700. The first one is the upper boundary of the S&P’s trading range in which it was moving since the crisis. The index broke out from this range early December to continue its rally until the end of January. The index now is very likely to test back the upper boundary of its previous trading range and bounce from there. That would stop the correction at around 2690 points (Chart 1).
There are two other Fibonacci levels which would strengthen this level, one of them is the 100% level of the rise since the market has broke out from its trading range, and the other is the 23.6% level of the advance since the index bounced from the bottom of its trading range (Chart 2). Both levels are located near 2675 points. So if the index falls between 2675 and 2690 that would be a good forex signals buy opportunity.