Fairly Deep Correction

Maybe the Update was too cutesy a couple of days ago when we decided to unload our shorts and realize some gains for the year, because the stock market had trouble maintaining its ground on Thursday.  The headline number of down 83 represented by the Dow Industrials showed a pretty good day relative to Wednesday’s 212 point explosion.  The NASDAQ Comp didn’t fair nearly as well by falling more on Thursday than it went up on Wednesday.  Tech weakness followed some quarterly earnings reports that forced some stocks down fairly hard.

As you probably know by now, the NDX, NASDAQ 100, is our favorite index along with the QQQQ, the ETF that tracks the NDX.  This index dropped more on Thursday than it went up on Wednesday, too, but we look at the lows of Tuesday for comparison.  That low was about 1448 and we compare it to the high of the move which was about 1496 or about a 48 point move up.  Using our Fibonacci ratio for a natural corrective move we would multiply by 0.618 (times the 48 point up move) and come up with about 30 points.  Now call me crazy but that would mean the Fibonacci prediction for a low in the correction would be 30 points down from the 1496 high which is 1466.  You might ask, “What did the NDX index close at today?” and we would have to say 1466.  

Does that mean the correction is over?  Well, not necessarily.  The correction is only over if the market stops going down.  So, will it stop going down?  In the after hours market, there were some interesting developments, the first being the GOOG earnings report and the second being the MSFT announcement of a $20 billion share buy back before August 18th.  Both of these seemed to bolster the market at least a little.  Don’t get me wrong, the market was very ugly on Thursday and the selling only stopped because someone rang the bell to close the trading day.  There are No assurances in the market, anything can happen.

Our position is that Tuesday’s lows are fairly important and, if broken, will probably usher in some very serious selling.  But, we are long the QQQQ’s and bought more today because we think the market will rally into the early part of August.  We are willing to change our minds because we are not committed to this position.  We are much more interested in the larger drop after this first drop gets corrected.  What that means is that we think the low point on Tuesday will provide a good bottom and we will correct this large drop from the January highs in the NDX.  We aren’t sure but the 1761 high down to the 1448 low is a nice 313 points.  A typical 0.618 Fibonacci retracement/correction would be 196 points bringing us back up to 1641.  We do not expect such a large correction but the 0.382 Fibonacci number (1-0.618=0.382) would get us back to 1550 which would be a spot to look for an end to the corrective move.

We apologize for the heavy tech talk this evening but we are trying to see if the market is behaving normally in the Fibonacci world and tonight it seems that it is.  We would start getting a little suspicious that the rally wasn’t going any further if we didn’t see some upside on Friday, especially if the market could break the Tuesday lows.  These are just guidelines, not really rules (any Pirates fans out there).

Have a good weekend.  

Dow Industrials:  10,928.10  -83.32
QQQQ:  36.08
RYVNX:   24.83
RYAIX:  25.72
TLT:  85.49
BEGBX:  13.39