Last week's stock market correction was significant in our opinion; for the technical patterns suggest the correction will continue in the weeks ahead. But more significant in the fact that if the correction extends sufficiently below certain levelsthen the entire rally cycle off the October-2002 is complete.
First and foremost, last week formed a bearish key reversal' lower that signals exhaustion from within the 50%-to-60% correction zone; this increases the probability of a test of the 1165 level, which is a mere 21 points lower. Thereafter, if extend lower through this level and then trendline support and the 65-week moving average then we must consider the rally phase complete. If this scenario doesn't materializethen obviously higher prices will develop; but given a rising interest rate environmentthis seems a fairly remote probability.
In any case, the most important trading decisions will be made regarding long/short sector rotation; this will be the key to outperforming the indices in 2005.
