Stocks correct. Question is: How significant will the correction be?

As discussed in US stocks are now 'phenomenally' overbought, it has been hard to know when the correction will come through. As equity markets have been supported by inflows of liquidity, which of course has created a bubble in stock markets. After markets closed on the 1st October 2009 the Dow lost 203 points (2.09%) the S&P 500 27.23 (2.58%).

The Dow is particularly interesting because I am looking at further falls for American express (as a 'put' option), refer to Dow rallies over 9000 closes at 9069 - July 2009 as this current sell off was lead by JPMorgan Chase & Co., DuPont and American Express , that ended up dragging the index lower.

Can a sustaining correction drop indices to lower levels? This is the big question, when ever we have had drop in stocks a rebound back into trading ranges has occurred. Depending on more band economic news, if supports are broken on the Dow at 9398 and 8993 we will see a collapse back down to July 2009 low (when the market rallied).

So a correction was due, but a bigger one may be pending.

Please click on graph for larger image:
(Note American express. All indicators show further selling. Also refer to tight trading range between supports. Pushing above 10,000 resistance has been wishful in the near term, a sustained breakout only if the USD collapses)