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In a little over a week, the major U.S. stock indexes erased months of upside. This is nothing new. Markets tend to fall a lot faster than they rise because fear can quickly turn into panic while bull markets tend to climb a wall of worry which keeps greed levels at check.
The typical market correction has three main stages: First, we see a swift and widespread move lower which reaches the momentum low of a correction. Then, there’s a snapback rally which typically retraces about half of the decline. Third, there’s choppy price action and potentially another leg lower which tests the momentum low from the first stage and even surpasses it. At some point in Stage 3, we will start noticing positive momentum divergences which typically mark the end of the correction.
10-20% corrections are a normal part of the market cycle. We get them once every two years or so. Corrections bring incredible opportunities for those who manage to preserve their capital and confidence during them. The deeper the correction the bigger the opportunities.
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