The 50% Retracement

I’ve mentioned here, on my show on the radio, & in classes that I teach that often times after a big move in one direction, a stock or index will move the opposite direction and give back half the move.  It’s called a retracement.  There are several normal retracements.  I notice the 50% retracement happens more times than not.  We saw that again today.

The S&P 500 peaked about 1265 on an intraday basis in mid September.  Then it fell all the way down to around 840 last Friday morning.  With the gains from yesterday and today’s open, the S&P 500 retraced 50% of that move.  Right at that point, the market turned around and headed lower (See the picture below).  This isn’t to say the move is over.  But, the initial bounce seems to be.  In other words, we knew the market would bounce and perhaps half way back up.  It did just did it in about 24 hours. 

Now comes the hard part.  Was that it or will we go higher?  It’s too early to tell.  Here’s the way the market sometimes works.  We could see it give back half of the gains from Friday morning to this morning and then resume the upward move.  That would be about 940 on the S&P 500. 

As far as today, we certainly didn’t get the follow through everybody wanted.  I made no moves two days ago, yesterday, or today.  I’ve made money all three days by holding a lot of cash, a lot of financials, and a few other positions.  I mentioned yesterday I would rather the market prove itself to me and buy more volatile stuff later than to jump on board the first day.  That’s still my plan.  So, no moves today and let’s see what tomorrow brings.

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