Dow Jones Industrial Average fell 1.88% to close at 16563, breach of 16750 warning of a secondary correction. Decline of 21-day Twiggs Money Flow below zero would strengthen the signal. Breach of primary support at 15500 is unlikely and the trend remains upward.
* Target calculation: 16500 + ( 16500 – 15500 ) = 17500
The S&P 500 also fell sharply. Reversal below 1950 warns of a test of medium-term support at 1900. Breach of primary support at 1750 again appears unlikely.
* Target calculation: 1500 + ( 1500 – 750 ) = 2250
The CBOE Volatility Index (VIX) spiked up, but remains below 20 — values normally associated with a bull market.
What caused the sell-off? Commentators seem puzzled. Theories advanced vary from Argentinian default to developments in Eastern Europe. Neither of these seem to hold much water: the market has been aware of the risks for some time and they should be largely discounted in current prices. My own preferred theory is the expectation of a rate rise from the Fed. With good GDP numbers and falling unemployment the Fed may be tempted to tighten a lot sooner than originally expected. Even oil prices are falling. High crude prices is one of the reasons for the cautious Fed taper so far.
Which makes me suspect that this correction is going to end like the last “taper tantrum” — with a strong rally when the market realizes that economic recovery will lift earnings.