A temporary reverse movement, usually negative, of precious metals, stocks, bonds or indices. Corrections are generally short-lived price declines on low volume, marking a transitory pause in an uptrend in a market. In contrast to bear (or a bull) markets, corrections are relatively shallow and temporary.
Eric enters the swimming pool just in time to see John take off from the springboard, perform a somersault and plunge into the water. In a couple of seconds, John emerges from underneath.
Corrections end bigger price movements and even out investors’ sentiment. In the precious metals market they usually start with a confirmed breakdown below a specific support level. Afterwards, the price falls down and another, lower, support level comes into play. Typically, if the lower support level holds, prices resume their move up along the long-term trend line. However, if the price closes three days in a row below the lower support level, the previous corrective pattern is invalidated and a more significant decline may unfold. Corrections in the gold and silver market are called “breathers” as they allow the investor sentiment to come back from extremes.
In most cases, the correction in a broader market will make the prices return to their support or resistance levels. These levels can be moving averages or previous points that serve as a tops or bottoms, or any other price level based on technical analysis.
Corrections push the price back to previously observed levels. Technical analysis focuses on the extent to which correction pulls the price back. A minor correction may wipe out about one third of the previous rally and a larger one may cover as much as two thirds. 50% corrections are also common, and they can be used to distinguish between major and minor ones. A 75% pullback is considered very deep and any correction bigger than that may signal that a new major trend has begun.
Fibonacci retracement is a method of determining support and resistance lines. It is created by taking two extreme points on the chart, a peak and a trough, and dividing this vertical distance by one of Fibonacci ratios (0%, 23.6%, 38.2%, 100%). 0% means start of a pullback, and 100% is a complete reversal of the trend. Once we have identified these levels, we can draw horizontal lines and use them as support or resistance levels. Fibonacci retracements are also used to generate target prices for a correction.
Correction in Gold
In 2010, a correction that started in the second half of June and lasted until the second half of July brought the price of gold down by 7.8%. It is worth noting that this correction actually provided a visible “breather” – the subsequent rally which lasted until October added 17.6% to the price of gold right at the bottom.
Correction in Silver
After the price of silver rallied throughout 2010, the white metal corrected in January 2011, to resume its upward move with more strength up until August 2011.
Correction in Mining Stocks
A correction in gold mining stocks took place in June and July 2012. The HUI Index dropped from 455.93 to 387.81 (-14.9%). However, the rally following the correction saw gold rise by 35.6%.