The Market Correction: Time To Get Scared?


Another selloff today, ushered in by currency issues in Turkey & South Africa and exacerbated by the Federal Reserve tapering their bond buying even more, led to losses of over 1% across the major indices. Are people nervous yet? Definitely, as this has been one of the most intense, while not deepest, market corrections in some time and the VIX is at a multiweek high.  So is it time to turn bearish yet?

In my opinion: no, as many short-term indicators are at historically oversold levels (see below). While this is not a guaranteed signal of an impending short-term bottom, it is reasonable to assume that the correction is in its latter stages (i.e. if you sell now, you're probably selling close to the bottom).

So, what is OM's in-house technician doing now? Well, I'm waiting for fading momentum. The selling intensity is strong and sentiment is negative, so once the downward momentum begins to fade I'll know that sellers are becoming exhausted. Then, I'll start buying. An indication of fading momentum could be in the form of an intraday positive reversal appearing on the chart as a bullish candle pattern, such as a hammer.

Profile photo of DDuring college Chris (D) earned the Chartered Market Technician (CMT) designation, and is currently the youngest CMT in the world today. The CMT certifies Chris' knowledge of market timing and risk management approaches. He tends to look for broad market moves and take advantage of them with index funds. The strategy he principally uses is mostly quantitative, and, tested, and has avoided or capitalized on every major recession since the 1940s.

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