After a long and enjoyable run, I recommended closing long positions on Thursday, 23 May. As well as exiting my remaining position trades, I also liquidated my FTSE 100 tracker. The selling continued into Friday, vindicating my decision. And then, the markets began to rally again on Monday 27 May, after only two days of downside. I had been hoping that they might dip at least to their 55-day exponential moving averages (EMA).
FTSE's short, sharp dip
A bounce from around the 55-day EMAs is exactly the sort of opportunity that the Irishman and I would be happy to buy. Such a dip would set up a repeat buy-signal on the swing-charts, as well as creating a better springboard for the more meaningful rally that I expect. Absent a retreat like this, I reckon the action could be choppy and directionless for some time.
S&P's ideal buying set-ups
For now, I am reluctant to go properly long of the indices once more. By this, I mean I don't feel like opening new position trades, where I go long and stay long for several days or even weeks. About the most I feel able to do is to do day trades, where I am nipping in and out of the indices in pursuit of the odd 1 per cent gain here and there. I like to open position trades as the markets are first thrusting higher after a proper shakeout.
S&P's shrinking volumes
While stocks are plainly ripe for such a correction, I think it's especially significant that the much lesser sell-off we've so far triggered was by the Fed's thinking aloud about when to start reducing monetary stimulus. This bull market has been built upon cheap cash. Take those foundations away and the whole edifice comes crashing down, as in the case of the end of the first two instalments of quantitative easing in 2010 and 2011.
Put another way, I don't think that Wall Street and the European indices would be in a long-term uptrend today but for the stimulus. The latter's effect has been overpoweringly strong, enough to offset the continually low and shrinking traded volumes, for example. Normally, of course, fewer shares changing hands alongside a rising index is a sign of internal weakness and impending difficulties. This has caught out many technical traders, and continues to do so.
Divergent Dow
Another indicator whose current message has been distorted is the weekly relative strength index (RSI). Like volume, this gauge has typically climaxed ahead of the price action during a bull market, warning of weakness ahead. Twice during the present bull market, the Dow's weekly RSI has swung from bearish non-confirmation to bullish confirmation, most recently in mid-April. I can find no other instances of this going back a century and more. It's yet another sign of quite how exceptional today's conditions are.
