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Tech blows a fuse

S&P turnaround

Technically speaking, this was not an obvious moment for such a decline to happen. The latest rally was in its early stages, such that the indices were not anywhere near overbought on their daily charts. The problem lay in the technology-laden Nasdaq 100, which has been steadily losing ground of late, even as the S&P and Dow were gaining. Whereas I had hoped the other indices would hold sway, they have instead followed the tech index lower.

Nasdaq nerves

Despite the severity of the selling, I think it is worth keeping a sense of perspective here. Two days of downside in the major indices does not amount even to a correction. The S&P 500 has not even entered a short-term downtrend according to its swing chart, let alone a more significant one, as measured by Dow Theory or a breach of the uptrend since 2012. No trend-follower worth his salt would change tack based on this action.

This is also true for the Nasdaq 100, the source of the current turmoil. Aside from the nasty selling on Friday 4 April, the downside has been modest. From high to low, the tech index has shed less than 7 per cent. That is pretty similar to its January 2014 and May-June 2013 dips, both of which turned out to be good buying opportunities. A decisive rally - preferably involving a gap upwards - will likely mark the start of its next recovery.

I do acknowledge that the bull market is much closer to its end than its beginning. The main reason for this is fundamental, as the liquidity that has fuelled its ascent is steadily withdrawn. Technically, though, there are other features that mark this out as a late-stage boom. In the case of the S&P 500, the new highs in price have not been accompanied by fresh peaks in its weekly and monthly relative strength indices (RSIs).

Negative divergence heralds highs

This state of affairs - known as negative divergence - has been seen in advance of most major highs in Wall Street over time. I have discovered, for example, that 15 of the 16 peaks in the Dow Jones going back to 1928 were heralded by negative divergence on the weekly RSI. The S&P, Dow and Nasdaq 100 were all diverging negatively as of their latest price highs. This is not a reason itself to sell up, however. It is merely a warning sign.

Dow's divergence today

Much the same goes for the Coppock sell signals for the S&P and Dow this month - see here. Contrary to popular belief, following Coppock's sell signals would have helped one beat these markets over time. I do not happen to follow its signals slavishly, though, even though doing so would be a perfectly viable approach. Only a plain reversal of the price uptrend will turn me from a bull to a bear. I shall consider what exactly this would involve next week.