In focus: Correction is at hand

By Lawrence G. McMillan

The Standard & Poor’s 500 Index and virtually every other major index broke out to new post-2008 highs (and some to new all-time highs) in the past few weeks. But as is always the case, the euphoria and momentum of buying produced some extremely overbought conditions. Those need to be worked off before the market can move higher, and thus a correction is at hand.

The final spike of “overbought-ness” came this past Monday morning, when the averages all gapped higher on the news of the killing of bin Laden. It was not a good sign, though, that the markets swiftly reversed back down from there — and are basically still falling.

The S&P 500 SPX -0.69%   itself was overbought in that it was getting too high above its 20-day moving average. At Monday’s high, it was 35 point higher, and that is “too much.” The 20-day moving average is at about 1335, and so a correction that slightly penetrates that average would still be within an overall intermediate-term bullish framework. So as long as SPX holds in the 1330-1335 area, it should be in good shape.

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