Is the market due for a correction in the very short term?

RSI and the Volatility Index may give traders a clue

Since the beginning of 2012 the S&P 500 has soared 7.5%. Based on the performance over the last couple of years investors would be thrilled with that return for a whole year, let alone six weeks. However, many trading professionals are treading lightly in terms of short term positioning. Since the last leg up the S&P futures have traded in a 13 point range, never above 1353 nor below 1340.

Could this be an indication of a move in one direction or another?

Brian Hunt wrote an article “A Major Concern for Traders Right Now” warning of a potential downside move indicated by a movement of the RSI. The article displays the past 12 months of trading in the benchmark S&P 500. Note the extra “pane” at the bottom. This pane shows the market’s “RSI”… an indicator that measures an asset’s “overbought” or “oversold” status.

“An RSI [Relative Strength Index] reading over than 70 means a market is overbought and due for a correction. An RSI reading under 30 means a market is oversold and due for a natural rebound. In other words, a market with a high RSI reading is a rubber band stretched to the upside and ready to snap lower… a market with a low RSI reading is ready to snap higher.

As you can see, the stock market’s RSI reading is as high as it has been in almost a year. Each time stocks have gotten to this “overbought” level, they’ve suffered sharp short-term selloffs.”

Another factor to consider is what has been happening with the Volatility Index (VIX) being at a near 13 month low. The VIX trades on the fear of the S&P based on option premiums and generally works inverse to the market. In Jeff Clark’s article “Bulls Beware: This Is the First Sign of a Correction” he shows why the VIX just fell out of a falling wedge pattern it has been in since October and why he also believes a correction is coming.

Of course if you are a long term investor holding growth stocks a correction might be of little concern over the long run. However if you are looking at getting in for the long term, you might want to let the price of your watched asset drop in the event of a market correction. Traders on the other hand, might want to beware.

Let us know what you think. Do you think a market correction is right around the corner? Or do we have one leg higher, setting up a correction at the start of the second quarter? Does a dip in the market not phase you one bit?

Read more from Brian Hunt: A Major Concern for Traders Right Now and from Jeff Clark: Bulls Beware: This Is the First Sign of a Correction

Email us at  iinvest@chesapeakeinvestment.com.

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Chesapeake Investment Services
Managed Futures Specialists