Having generated a sell signal according to the '21st century' version of the Dow Theory that I follow (www.thedowtheory.com), Wall Street has rebounded somewhat. The Dow Jones has made up more than half its losses since May's highs. It might be, therefore, that the dip is now over. This would fit the pattern of recent times nicely. Four of the past five Dow-theory signals have come within 3 per cent of the market's lows.
I would like to have seen the sell-off gone further, and believe it may still do so. A dip to at least the 55-week exponential moving average would make for an even closer likeness with the last three summers. This line sits at 1502 on the S&P, 13976 on the Dow and 2765 for the Nasdaq. Such a shakeout would set up a more obvious buying opportunity in my view.
S&P's recent corrections
In the first place, a pullback of more than 10 per cent would have whipped up a fair bit of bearishness. As of last week, the AAII survey showed 30.3 per cent of US retail punters were bullish, with 35.2 per cent bearish. An even wider gap of at least 10 points would be a much better springboard for an advance. Some of the best rallies are born amid fear and scepticism.
A deeper retrenchment would also lead to a stronger snapback rally. Depressed weekly relative strength index (RSI) readings typically give way to bounces covering many per cent and lasting several weeks. Since May's highs, the S&P's lowest weekly RSI reading was 56. The last three really significant rallies began with readings of 38, 41, 42 and 43.
Dow's lukewarm recovery effort
The rally of recent days - while decent enough - does not really look like the big, booming moves that kicked off the recovery rallies in 2010, 2011 and 2012. The Dow's most impressive up-day - on 26 June - covered just 1.15 per cent. Ideally, the daily trough-to-peak move should cover at least 1.5 per cent, and really quite a bit more. This makes me suspect that the recovery effort is a phoney.
In the meantime, my criteria for seeking long day-trades on Wall Street were briefly met. All three indices saw their 21-four-hourly exponential moving averages cross above their 55-EMAs on Monday 1 July. Following that signal, I again started trying to buy in on intraday pullbacks in these indices. I also liked the look of the FTSE 100, which had rather an impressive 1.6 per cent up-day on 1 July. But these signals have since been largely overturned.
Amid all these conflicting alerts, my instinct is to do as little as possible when it comes to the indices. And, where I do trade I shall be doing it in small size and over shorter stretches than usual. I am also looking more than I usually do for trades in the euro/dollar and sterling/dollar exchange rates, where clearer trends are in evidence and, unlike in the indices, where I've also been getting it right lately.
