Technically Speaking: Tis But A Flesh Wound

In this past weekend’s missive, I discussed the recent market sell-off:

“Well, this past week, the market tripped ‘over its own feet’ after prices had created a massive extension above the 50-dma as shown below.  As I have previously warned, since that extension was so large, a correction just back to the moving average at this point will require nearly a -6% decline.”

Chart updated through Monday

“I have also repeatedly written over the last year:

‘The problem is that it has been so long since investors have even seen a 2-3% correction, a correction of 5%, or more, will ‘feel’ much worse than it actually is which will lead to ’emotionally driven’ mistakes.’

The question now, of course, is do you “buy the dip” or ‘run for the hills?’

Don’t do either one, yet.

Yes, corrections do not ‘feel’ good. But they are part of a ‘healthy’ market cycle. In more normal, healthy, bullish trends corrections should be used as buying opportunities to increase exposure to equity risk in portfolios.”

Yesterday morning, the markets began the day deeply in the red, but by mid-morning were flirting with positive territory before sliding lower again. By the end of the day, the Dow had posted its largest one-day point loss in history. 

Not surprisingly, by the end of it all, bonds were up sharply, as anticipated, as investors sought safety from the sell-off.

While the market found support at the 100-dma, an attempt to bounce is still anticipated from the short-term “oversold” conditions that have now developed during the “bloodletting.”

“At the moment, this is the expected correction we have been discussing over the last several weeks. It is also something we had planned for by reducing overweight positions and adding a short-hedge to portfolios.”

With yesterday’s sell-off, the markets are on a short-term sell signal which continues to apply downward pressure. However, the with the market now oversold on a VERY short-term basis (red circles), a rally over the next day, or so, would not be surprising.

As I noted, it is the outcome of any rally which is most important to the current bull market advance.

This is what we are looking for to drive our next set of portfolio actions: