The S&P 500 is nearing "official" correction territory, with
panicked traders sending it down 9% in a matter of weeks. With all
medium-term support lines and moving averages now broken, the last of
the stops should soon be taken out. When that happens traders should get
the chance to pounce on a good oversold bounce.
To be clear, I am not calling for the start of a new major bull
market leg. Rather, the S&P 500 is reaching oversold levels, and
like a rubber band that has been stretched too far, we could see a
violent snapback rally.
For evidence of this, let's turn to the charts.
Small-cap stocks, as represented by the Russell 2000 (red line), have
notably lagged in performance all year and were the writing on the wall
for observant market participants. After double-topping with its highs
in March and July, the Russell 2000 developed a significant lower high
in early September, just as the S&P 500 (blue line) crawled to a
fresh all-time high, thus flashing a major divergence.
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