Is A Correction Starting? - Mike Swanson (10/20/10)

Yesterday the S&P 500 fell 18 points while the DOW dropped 165 points. The sell-off was led by big cap tech stocks and IBM and Apple in particular as traders dumped those two stocks after they announced earnings. Looking at the news stories this morning the financial press is focusing on this "bad news" as a reason the market fell.

But in reality this is a market that has been very vulnerable the past few days, because it has been going straight up for almost six weeks now and reached a very overbought condition into earnings season - a time in which traders often take profits on stocks that they bid up for the general public to buy at high prices.

I don't know if the market is going to immediately drop from here, but it certainly looks to me like we are likely to see a little more selling in the next few weeks to come.

The current support level for the S&P 500 is in the 1120-1130 zone. 1130 marks the 1/3 retracement point for the September bottom and current October high while the 1120 area is the point of the markets 50, 150, and 200-day moving averages.

I expect we'll see the market go into this area within the next month and put in another bottom there and bounce back up.

Even in the most bullish markets such corrections are routine and tend to start regularly in the second week of earnings season which we are in right now.

If investors were as bullish right now in the sentiment surveys as they were in last January and April then I would think we are seeing another major top, but they aren't that bullish so I assume that the market will shake off its next correction whenever it gets going.

We may trend sideways for a week or two - maybe even go higher a few days at the start of November into the Congressional elections and FOMC meetings - but right now the overall risk to the market for the next several weeks is to the downside.

That said I really have no interest in buying stocks until we see a pullback in the market. Once it comes I'd look to buy stocks that have held up and are poised to breakout of bases.