Now comes the hard part, trying to identify the nature of the correction that we will go through if in fact there is going to be  one. The point and figure count at the 1565 level gives a price objective of 1705 to 1730 and the S & P 500 reached roughly 1690. This move took us to the top of the long term trend channel that has been in effect since 2009. One would reasonably think that a move to the bottom of that trend channel would be a healthy 9% correction or so.

Problem is that the markets have not built much of a cause for such a move. The point and figure chart at the top of the graph gives an objective of 1565 to 1585 on the downside. A correction to that level would not be very serious.

point and figure chart s&p 500

Should the correction continue unabated from this level to 1565-1585 the short term trend line will have been violated (the white line in the upper end of the long term trend channel). Such action would weaken this most recent trend, however, allow for a new attempt to go to new highs. The market could also bounce off the short term trend and attempt to move higher. Should the markets fail to reach a new high it would suggest that an area of distribution is forming with a larger count on a point and figure chart. This new count would theoretically allow for a more severe correction.

It is usually necessary to build a count and the count now is not too great.

s & p 500

Perhaps the best advice that I could be giving would be to tighten up your sell-stop positions. (A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.)

Let’s take a look at an example of what I’m talking about. Gap Stores built a cause at the 17-22 range (7 boxes x 3 reversal chart) of 21 and adding 21 to about 20 where the rally started gives a price objective of 41. The objective has been met and the stock could rebuild a cause for another move higher. However, to be on the cautious side I would execute a sell-stop order.

gap point and figure


gap stores bar chart

A break below 39 1/4 would suggest that the up trend was ending and if you are happy with your profit a tight sell-stop order at 38 1/2 might be appropriate. Gap Stores was trading for about 10 at the beginning of this current bull market in March of 2009.

More than likely the markets will trade down to sideways for a period of time to build a cause. The question remains will that new development be for a move to the upside or down to the bottom of the long term trend channel. Risks are always higher when the market has moved so high. If you get kicked out of a stock and the market builds a cause to move higher there is nothing stopping you from finding another good investment.



Pin It on Pinterest

Share This