“Is that it?” a reader asked in an email to me on Friday. “Is the bounce over? Is the market now headed back down to retest the October low?”

Well… we can’t know for certain until after the fact. But we can make an educated guess.

Regular readers know we’ve been using the February correction as a road map for the current correction. And, so far, that road map has been quite accurate.

During the February correction the S&P 500 lost 295 points – from its closing high of 2875 to its early February closing low of 2580. The October correction was 290 points.

The bounce off of the bottom in February recovered about 60% of the loss from the initial decline. So, as I mentioned last week, if the current “bounce phase” were to follow the same script, that would give us a target of somewhere between 2810 and 2850 on the S&P 500.

The index closed at 2814 on Wednesday. So, we’ve hit the minimum target for our roadmap. And traders ought to be on the lookout for the start of the “retest phase” where the market heads back down again to retest the October lows as support.

Frankly, though, I think it still might be a little early for the start of that phase of the correction.

Let me explain…

Remember, the bounce phase does two things… It punishes folks who got aggressively short stock into oversold conditions. And it causes everyone else to fear that they’ve missed the bottom in stocks and are about to miss out on the next big rally.

Short sellers have definitely been punished over the past two weeks. But, I don’t think we’re seeing quite the amount of “fear of missing out,” or FOMO, that typically marks the end of a bounce phase.

For example, on Friday, the CBOE put/call ratio closed at 1.11. That’s towards the upper end of its recent range. It’s not even close to the 0.80 level that often indicates a high bullish sentiment (a contrary indicator). And, it tells us traders are still buying more put options than call options.

In other words… I’m not feeling the FOMO. So, I suspect we haven’t quite reached the end of the bounce phase yet.

Also, our roadmap suggests we still have some more upside. Here’s an updated chart of the S&P 500…

Back in February/March, the bounce phase ended when the 9-day exponential moving average (EMA) (the squiggly red line) rallied up to and nearly matched the 50-day moving average (MA) (the squiggly blue line). Right now, the 9-day EMA is still far below the 50-day MA. It will take a few days of choppy or upside action to help close that gap.

So, I’ve drawn a dotted blue line to indicate what I think is a probable move over the next few weeks.

If we move lower today, then look for the S&P 500 to find support at its 9-day EMA – near 2760. From there, look for a bounce back up to the declining 50-day MA – which would be the ideal spot at which to put on a short trade. I suspect that might take several more days to play out.

Otherwise, if the market rallies today and the S&P makes its way up to its 50-day MA, then that shortens the time frame for the start of the retest phase. 

Under either scenario, traders need to be careful about getting too aggressive with long exposure right here. The retest phase of the correction is coming. The only question is whether it happens sooner or later.

Based on the current chart pattern, I’m going to guess later – meaning it’s still a week or two away. But, traders should stay open to any possibility.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, a Delta Report subscriber thanks Jeff for the service…  

Hey Jeff, just want to say thanks for all of your updates on the markets and gold stocks in Delta Direct line. I would be totally lost without your service right now! Just wanted to let you know I’m here and read everything you write and appreciate every post!

With a full-time job and multiple part-time jobs, I don’t have time to write in very often, but I spend several hours a day trying to stay caught up on my subscription services and trading my way to freedom and not into the bread line, lol
.

– Ryan

Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming to feedback@jeffclarktrader.com.