The Number to Watch for a Correction

In the coming days, the S&P 500 is likely to push to new highs or break crucial support at 1,538

By Serge Berger, Head Trader & Strategist, The Steady Trader

New York, Apr.17, best stock  .- As discussed in this column yesterday morning, Monday’s rapid sell-off stood a good chance of taking a breather on Tuesday to work off immediate-term oversold readings and wait for more corporate earnings to hit the tape. Just as stocks finished at their absolute lows on Monday, they closed Tuesday at their absolute highs of the day. As a result, the U.S. equity landscape was marked with inside days.

Tricky tape, you say? Just be sure to have a process in place and the willpower to stick to it through thick and thin to keep your emotions at bay. Otherwise, as many an experienced trader will tell you, this game quickly turns into something that more closely resembles gambling.

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One clearly visible inside day was on the chart of the Russell 2000. A break through the support line could cause the index to work toward a better support level around the 860 area. On the chart of the iShares Russell 2000 Index (NYSE:IWM) above, the corresponding level is $86.

The coming days and weeks will bring about a stampede of corporate earnings announcements, and as such, it makes sense that investors and traders will want to wait for more data before making broader portfolio allocation decisions.

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The S&P 500 showed a good bounce Tuesday, and again proved that the November 2012 uptrend line serves up a healthy dose of support. As long as Monday’s low of 1,552 holds, the index is simply in an intermediate-term overbought consolidation phase.

However, should the mid-March/early April support level at 1,538 give way, I would declare the move to be a correction. The coming days stand a good chance of either pushing the index into a correction or to new 2013 highs.

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On the sector front, most of them retraced (made good) around half of Monday’s selling. The big exception here being the consumer staples sector, which continues to defy gravity, and pushed to a new 2013 high (red line) on Tuesday. The sector being made up of defensive types, its relative strength does raise an eyebrow or two.

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After the clobbering on Monday in precious metals, they also took a breather on Tuesday. Beyond the near-term bounce, however, both gold and silver continue to look weak and anything more than a scalp at this stage needs a better confirmed bottom. Patience is key.

All in all, it was a rather quiet day as judged by the few broker calls I received and an almost entirely dead Twitter tape (follow me @SteadyTrader). Stay tuned for reactions to earnings announcements, and remember that the trades with better odds set up after an earnings announcement rather than blindly holding a stock through the numbers..