Behind the Money

History, Volume Signal Correction Hasn’t Run Course

The one day pop on Thursday based on hopes the European Union debt contagion has been contained is the kind of backing and filling that takes place during a corrective phase in the market following a monster run.

One day after a Greece accord was supposedly reached, sending global growth names like Freeport McMoran higher, economic data out of the Euro Zone and news that China is doing more tightening, has reversed these very same names lower today. Freeport MacMoran and U.S. Steel are poised to close down more than 2 percent today.

“The current retreat clearly has further to go both in terms of magnitude and duration to the downside,” wrote Scott Davies, market technician for Brown Brothers Harriman, citing historical patterns.

Davies analyzed the six “V-Bottom” recoveries that have taken place after bear market bottoms since 1930. A 70 percent advance since March 2009 certainly fits the bill of a “V”-shaped market recovery. Following recoveries of this magnitude the current downturn since January 19 of 7 percent “falls short of the feeblest of corrections in our sample set (the 12.3 percent correction seen in 1943 being the smallest), and more importantly falls well short of the average during of 21 weeks,” wrote Davies, in a note to clients.

Using this historical precedent, he puts a floor at the S&P 500 around the 966 to 1036 range, hitting somewhere in the next quarter. That represents a 4 to 10 percent slide from here.
The legendary technical analyst Louise Yamada, who spent 25 years navigating markets at Smith Barney before starting her own shop four years ago, likes to say “volume is the weapon of the bull.”

The average volume this year on down days is stronger than the average activity on up days. The conviction in this market is still with the bears…for now.

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