A comment to the August 9 post asks why I called the past 3 months of red bars a 'correction'. Was it not just a fall in the market? Well, to paraphrase Julia Gillard: 'That's a good question. I'm glad you asked.' The short answer is that the use of the word 'correction' is just a personal choice. Admittedly, it implies the market will resume the upward move. (Whether that's reasonable remains to be seen.)
The chart to the left shows the rally from a low of about 3100 in March 09 to a high of about 5050 in April 10 - a move of 1950 points. The decline since April was about 800 points - a decline of about 38% of the previous rally. The 38% level is a significant support level. If the bars stay blue and the market moves above the April high, then the past 3 months of red bars will be considered a short term set-back to a longer term up move - a true correction.
But there is another way to look at this. The next chart is also significant. This chart shows the move down from the October 07 high to the March 09 low - 6800 to 3100. That's a move of 3700 points. It could also be said that the recent rally (March 09 to April 10) wais just a 'correction' of the previous down move. And more significantly, that 'correction' was almost exactly 50% of the previous down move. If the rally was the correction, then the past 3 months of red bars could just be the start of the resumption of the down move.
The chart to the left shows the rally from a low of about 3100 in March 09 to a high of about 5050 in April 10 - a move of 1950 points. The decline since April was about 800 points - a decline of about 38% of the previous rally. The 38% level is a significant support level. If the bars stay blue and the market moves above the April high, then the past 3 months of red bars will be considered a short term set-back to a longer term up move - a true correction.
But there is another way to look at this. The next chart is also significant. This chart shows the move down from the October 07 high to the March 09 low - 6800 to 3100. That's a move of 3700 points. It could also be said that the recent rally (March 09 to April 10) wais just a 'correction' of the previous down move. And more significantly, that 'correction' was almost exactly 50% of the previous down move. If the rally was the correction, then the past 3 months of red bars could just be the start of the resumption of the down move. 
This was very helpful! I got confused because I was under the impression that the market changed all the time. Are you basically saying that instead of a constantly changing market, we have a market which tends to follow trends and when a general trend is altered and then that trend appears to begin to resume again, the period of time between when the market was not following the 'trend' is a period of so called 'correction'?
ReplyDeleteSometimes trends are evident. At other times they are not. Since the top of the market in November 2007, there has been a clear down trend and a clear counter-trend move. As I have already said, we are now in an in-between situation. Will we resume the larger down-trend or the smaller up-trend? This is difficult to predict. What is easy to know though, is that if the XAO Indicator is red (particularly at the moment), it probably is not a good time to be long.
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