Stocks took a turn for the worse last week, increasing correction fears among investors and traders. Before the weekend missile and drone attack by Iran on Israel, some were already suggesting that a more significant top was being formed. In an early reaction to the news, Bitcoin saw the largest slide since 2023 as it lost 7.7% on Saturday.
The analysis of the advance/decline data at the end of March was positive for the S&P 500, as it had exceeded its monthly starc+ band in both February and March, indicating that market risk was now higher on the long side of the market. Starc bands, developed in the mid-1980s by Manning Stoller, offer a unique way of interpreting price action that differs from Bollinger Bands.
Constructed so that roughly 92% of price action will be contained within the bands, starc bands help identify when prices are near extreme highs or lows. For example, when prices are at or above the monthly starc+ bands, they are more extended than if they were above the weekly or daily bands, projecting a price range for the next period.
The S&P 500 chart for April showed a 2.5% decline after five positive months in a row, with the monthly starc+ band for March projecting a high of 5264. The monthly starc- band is not often exceeded, with instances in June 2022, March 2020, and December 2018 as the S&P 500 hit extreme lows.
The Dow Jones Industrial Average dropped 2.4%, barely maintaining its year-to-date gains, while small-cap iShares Russell 2000 fell 2.8%. Despite a smaller decline of 0.6% in the Nasdaq 100 Index, the SPDR Gold Shares were the only asset to finish the week higher, with a 0.8% gain and a 13.45% increase year-to-date.
The New High and New Low data indicate a potential correction, as the number of stocks making new highs has been declining. Analysis of the VIX and VXN also suggests further correction. The type of correction, whether sharp but brief or prolonged, will depend on how bearish sentiment builds in the market.
