I say "a bit" uglier because I still maintain that the sell-off so far is no great shakes in the bigger scheme of things. As of the lows of Tuesday 23 October, the S&P had only shed 4.5 per cent from its bull-market highs and the Dow was 4.2 per cent off. Our own FTSE 100 index, meanwhile, was a mere 2.4 per cent below its most recent peak of mid-September.
FTSE's faint correction
The weakness of the Nasdaq 100 is a slightly more disquieting feature, however. The tech index has tumbled 7.6 per cent from its bull-market peak. Many traders treat this as a sinister omen. The logic is that if the raciest part of the market is under pressure, the rest of the market is likely to succumb too. Personally, though, I feel that 3 per cent underperformance is insufficient evidence of catastrophe ahead.
As a result of the latest declines, the Dow is now sitting right around the rising trendline drawn up from its October 2011 lows. Big deal, I say. I am no lover of trendlines, as they are typically based on subjectivity. The Dow has breached a trendline such as this one on at least half a dozen occasions since March 2009. None of those instances marked the end of the bull market.
Dow tests its uptrend
My preferred way of defining a trend is with moving averages. When the price is above a certain moving average, and that average itself is rising, I would say that the price was clearly in an uptrend. The 200-day average is probably the most widely-watched average of them all, and is a reasonable proxy for the medium- to long-term trend. The FTSE, Dow, and Nasdaq especially are not far above this line.
If the indices bounce convincingly from around or from above their 200-day averages, it will be another clear buying opportunity in my book. It would reaffirm that the uptrend was still intact and that a new significant phase of buying was probably underway. The S&P’s 16.4 per cent rally from early June began after it dipped briefly below this line.
S&P's last low
It may be that the indices need to reach genuinely oversold levels before they can really start to motor again. They are not far off becoming oversold, at least according to my preferred measure, the daily relative strength index (RSI). The Dow's RSI reading was down to 34 per cent as of Tuesday's close, as was the Nasdaq 100's. When these indices are in a bull market, I'd say 30 per cent was oversold.
Tech takeoffs
A good clue that the tech index was back at the races would be a gap to the upside on its daily chart. When the Nasdaq opens one day above its previous day’s highs, it often heralds the start of sustained rally. That was certainly the case at the June lows, and then again when the market took off in early August. Until then, I'm content to take small intraday short positions.
