Assuming that a correction has begun, we’re going to calculate some potential downside targets for this move.
In the last couple of years, the only two examples that came close to matching yesterday’s massive bearish engulfing candlestick on the Nasdaq were in January and April 2000, and led to short, sharp declines of 7%-20%. (See two charts below, first of yesterday’s Nasdaq candle and the second of the early 2000 examples.)
We expect that this correction will retrace at least half the gains off the September 21 lows, but we will provide a 38.2% and 61.8% target too, which should cover the main Fibonacci scenarios. Further than a 62% retracement, and the correction becomes a trend in its own right. That said, here are some potential downside targets:
Nasdaq: 38.2% – 1614; 50% – 1571; 61.8% – 1527.
Dow: 38.2% – 8944; 50% – 8776; 61.8% – 8607.
S&P: 38.2% – 1045; 50% – 1026; 61.8% – 1007.
We’ll look for a completed corrective structure to occur near those levels.
And now for a quick look at valuations from companies reporting earnings last night. Texas Instruments trades at 5.2 times sales and 4.3 times book value; Apple
, 1.1 times sales, 1.64 times book; AMD
, 0.80 times sales and 0.95 times book; Travelocity
, 1.18 times sales and 2.95 times book; Newport
, 1.73 times sales and 1.25 times book; Broadcom
, 6.42 times sales, 1.75 times book; Symantec
, 3.75 times sales and 2.49 times book; Siebel
, 5 times sales and 5.68 times book; and Check Point
, which may have a PE of 25, but is trading at 15 times sales and 10 times book.