This chart illustrates the divergences that began to form as the S&P 500 rallied into the new year. As prices continued their trend higher, momentum oscillators failed to confirm the new highs and volume began to taper. I think it is also important to note that there has been no significant upsurge in volume to confirm the recent correction.
If the current correction is merely a retracement of the rally from July 2006 to February 2007, then we would expect the S&P 500 to retrace either 38% or 50% of this 242.28 point rally. Such retracements would take the S&P 500 to 1369.02 or 1340.43. A 62% retracement would take this index below its May 2006 high of 1326.70. This would suggest that a more significant correction was taking place.
The fact that the S&P 500 failed to reach the 38% retracement level suggests that further movement awaits to the downside. In the mean time, it is helpful to know how far the current bounce should go. The S&P 500 declined 87.60 points from the February 22 high to the March 5 low. The significant resistance levels for a correction of such movement would be at 1407.43, 1417.23, and 1428.11. You might note that the 38% retracement level at 1407.43 was tested on both March 8 and 9, only to see prices fall back below that level.
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