Correction Over or Almost Over

The chart above depicts the average rate of change for the SPX, obtained as an average of rates of change calculated for 3 different periods. I first saw this indicator on Will Rahal's blog. Although discontinued since 2009, this blog is the most informative source on the internet when it comes to learning trading. I highly recommend reading all the posts from 2007 until the end to anyone who is still defining their trading style.

Back to the indicator, notice how it got oversold recently, touching the upper horizontal black line. That's the oversold level during bull markets. The lower line, if touched, would suggest a bear market has started.

Since we currently still are in an expansion that is expected to accelerate in the second half of the year and the market is oversold, the bottom of this correction is already in or very close.

I am contemplating two scenarios:

1. the market breaks lower than the recent lows at 1258 SPX and forms a bottom there.

2. the market goes down for a few more days from here, piercing the 200 DMA but then starts its move up.

I think today will provide precious info as to which scenario will play out. If the drop is contained and there is not much weakness after lunch-time, then scenario 2 will be favored. Otherwise the other scenario might play out, which would put a bottom somewhere between 1230 and 1250 SPX.