I ask this because, despite the uncanny similarities with 2010 and 2011, I am still not convinced we are doomed to suffer the same bear market, or near-bear market, conditions once more. Whereas I ignored technical indicators that pointed to a top in those prior years, the same warning lights have not flashed red this time around. Even after the more aggressive selling of recent sessions, I still maintain there's insufficient evidence of a major high having formed.
Nevertheless, I have not fought the short-term trend. Despite the bullish noises I made last week, I have been doing some small shorts over recent sessions. I am much more attracted to shorting the UK and Europe than I am to betting against the US. The FTSE and DAX have looked far weaker than their American counterparts for quite some time. The FTSE closed below its 200-day moving average on Tuesday 9 May, which is a significantly bearish development.
FTSE below its 200-day average
As a result of its decline, however, the FTSE is already nearing oversold levels on its daily chart, with a relative strength index reading in the low 30s. Accordingly, some sort of decent bounce may ensue before long. The nature of that bounce should tell us quite a bit about the outlook. Another shallow, choppy recovery, such as we saw in mid-April would signal further weakness in the pipeline. A strong, decisive bounce would be a good clue that the bull market was resuming.
FTSE's fake April comeback
Whichever sort of recovery in the FTSE we get, I do not intend to buy into it. The US indices are a much more compelling near-term recovery play. The S&P, Dow and Nasdaq remain miles above their 200-day averages, satisfying one basic definition of a strong bull market. I have no reason at this stage to change my forecast that the Dow will head for 14450 before its bull market ends, with the Nasdaq to reach 2960. A bounce from daily oversold levels in one of these indices makes a much likelier buying opportunity in the coming days.
S&P's wild '11 ride
Graham Cox has emailed in to suggest the possibility that the US indices could stage a recovery, taking them back to their previous highs before a further, deeper swoon in the late summer. That was certainly what happened last year and it caught out almost everyone in the process, myself included. If we do get such a move, the key thing I will be watching is how many other international indices join in. If it's a widespread affair, the chances that it will prove sustainable are surely that much better. I should really develop an indicator along these lines.
Nearly oversold gold
While I am currently seeking small intraday shorts in gold, I think another bounce in the yellow metal could also happen fairly soon. It, too, is approaching oversoldness on its daily chart. A decisive upturn from those levels will almost certainly get me to go long, particularly if it does not drop below $1,524 beforehand.
