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This "Line in the Sand" Marks Disaster for StocksBy Brian Hunt, editor in chief, Stansberry & AssociatesMonday, April 19, 2010 After ticking higher nearly every day since the beginning of March, stocks finally had a big "scare day" on Friday.
The benchmark S&P 500 index fell 1.6%. Financial stocks – whose moves often precede broad stock market moves – fell 4%... spurred by a 13% fall in shares of investment bank Goldman Sachs, which is now facing an SEC lawsuit.
For months, investors have been hearing claims that stocks are way too expensive, way overbought, and way overdue for a major correction. So the question now is, "If Friday was the start of a correction, how far can the correction go?"
Today, we'll consult a little "common sense technical analysis" for the answer.
Below is a chart of the past year's trading in the S&P 500. As you can see, the market has enjoyed a huge rise since mid-February. This rise ended (for now) with last Thursday's close at 1,211.67.
 As you can see, a small decline – say down to 1,100 (-9.2%) or 1,125 (-7.1%) – would scare many investors to death, but would be a normal occurrence in a stock bull market. It would be no cause to dump everything and move to a fallout shelter in Montana.
If Friday's decline is the start of a more significant amount of selling, the S&P 500 could suffer a big correction down to the 1,075 area... and still remain in the confines of a "higher highs and higher lows" uptrend. This would be a decline of 11.3%.
What would be cause to get seriously worried? After all, any good investor or trader keeps an eye on the "worst case scenario"... the biggest risks to his or her wealth.
Worst case, take a look at points (A) and (B) on the chart. These two points are the lowest lows the sellers managed to push the stock market down to in the past six months. Should the stock market break these lows, the potential problems of overvalued stocks, more subprime aftershocks, and government spending gone crazy are getting worse... and creating a severe bear market.
Whichever camp you fall into... stock market bull or stock market bear, keep an eye on the A and B levels. Chances favor a moderate correction. But if you see a break below those levels, you might want to start shopping for real estate in Montana.
Good trading,
Brian Hunt
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Auto parts rally continues... Lear, TRW, American Axle make fresh highs.
Google slips... After 6% fall Friday, online search giant is off 10% in 2010.
Rates sliding again... 10-year U.S. Treasury yield drops to 3.8% from 4% peak in two weeks.
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