FTSE changes trend
In the process, the FTSE 100 and Germany’s DAX 30 have both given change-of-trend buy-signals on their swing-charts, on Thursday 4 and Tuesday 9 July respectively. The S&P 500, Nasdaq 100 and Dow Jones all remain in downtrends on their swing-charts, by contrast, and poised to give repeat sell-signals. I regard this as a mere technicality, though, rather than a bearish portent.
DAX bounceback
Despite being in swing-chart downtrends, the S&P and Dow have now clawed back around three-quarters of their losses of late May to late June. The Nasdaq 100 has made up slightly less than this. I struggle with the idea that markets that have retaken so much lost ground should be classified as trending downwards. The S&P’s 6 per cent rally and the FTSE’s 8 per cent jump clearly represent profit-making opportunities.
Dow's unlikely 'downtrend'
I am the first to admit that the structure of the moves higher could have been a lot more persuasive. The big intraday lurches lower give the charts an indecisive feel. I am far from being a raging bull at this time. But I cannot see the point of sitting out a tradable - if imperfect uptrend - still less of trying to short it. As I set out last week, the best thing in these conditions is to scale down the size of one's trades and the length of each position.
There is plenty of scope for this rally to continue, going by the state of both the daily and weekly charts. The relative strength indices are still some way off becoming overbought on both timeframes. Uptrends typically come to an end once a state of overboughtness has already been registered for quite some time. Put simply, if the bull market has now resumed, as it seems to have done, the rally is still in its infancy.
If this rally is a phoney, however, it could well come a cropper as the indices near their prior highs. In the case of the S&P 500, this means May’s record peak at 1687, and 15542 and 6875 respectively. A good example of this sort of activity was back in 2011, when the S&P dropped around 8 per cent over six weeks, before rallying back to the highs, and then suffering a near-bear market slump. Today’s action so far is not wholly unlike this. But I’ll only worry if and when the reversal comes.
Oversold gold
Talking of bull-market highs, I am reading more and more obituaries of the boom in gold. From the peak in September 2011 to the June 2013 lows, the yellow metal fell 39 per cent. I don’t think this in itself is terminal for the long-term uptrend in gold, which is still intact for now. It is worth remembering that this market halved mid-way through its 1970s boom, whereafter it soared more than eight-fold.
I recall that episode because there are a couple of similarities between then and now, at least on the charts. First, the monthly relevant strenth index (RSI) recently recorded the same sort of low 30s reading that it did around the major trough of 1976. Very oversold readings in 1982 and 1985 also gave way to big bounces. With little sign of this for now, I’m happy to keep doing intraday shorts.
