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The Dow's correction has more room to move

Adam Jeffery | CNBC

U.S. stocks on Monday fell for a third session, with the S&P 500 closing below its 200-day moving average and the Nasdaq Composite off 8.6 percent from its September record, leading traders to warn of a deeper correction, but charts suggest a potential buying opportunity.

The U.S. market has been running hot for months. It's a well-established and long-term sustainable trend propelled by 'funny money' available at virtually no interest. Fundamentally, its suspect, but technically this has been a trading opportunity not to be missed.

I have been calling the DOW, S&P 500 and NASDAQ higher for months in CNBC columns. I have also warned that these markets will pull back and that a 10 percent correction is a buying opportunity.

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If you understand where a 10 percent pullback is located, you will have the opportunity to take advantage of this temporary correction in the trend. A fall below 10 percent is a signal of a potential trend change.

A 10 percent correction in the DOW would bring the market back to the center line of the long-term uptrend. That's still bullish in anyone's language. A 10 percent correction on the NASDAQ would bring the market back to just above the support level and still well within the long-term up-sloping trading band.

A 10 percent correction on the S&P is more serious. This would drop the S&P below the support level near 1850 and below the lower edge of the long-term Guppy Multiple Moving Average (GMMA). This development would signal a high potential for a major trend change. The S&P is the canary in the coal mine.

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Fundamentally, the biggest threat to markets is Ebola, not ISIS. Ebola has the capacity to rapidly overwhelm health systems and paralyze work environments.

You have a choice: Join the screaming chicken littles or watch the charts and act accordingly. I know what we will be doing.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.