The market sell off of the past few days has many investors in a panic when it is probably an occurrence they should welcome with open arms. The Nasdaq has languished for months without a significant move either up or down. This downturn is just setting the stage for the next big upward move offering the next significant profit opportunity.

How bad is the damage so far? Below is a chart of the Nasdaq over the past two years. The red line shows that the index has retreated to the same level where it started the year. It is about 150 points lower than its high for the month–a loss of about 6%. The unique feature of this downturn is its slope. A look back over the two years on this chart shows nothing comparable when it comes to steepness.

The gold line on the chart is a 200-day simple moving average (SMA). Notice that the Nasdaq broke below its 200-day SMA a couple of days ago for only the fourth time in the past two years. On two of those instances, the index stayed below that mark for a short stint. On every occasion, when the index moved back above its 200-day SMA, it posted double-digit gains in a short period. So we should be glad that the index has declined, because it offers us hope that it will soon make an even bigger move to the upside.

Of course, there is no guarantee that this is not the start of a prolonged correction. But with most economic fundamentals still positive, there is no reason to believe this is anything more than an overdue, short-term correction. GDP remains strong, unemployment is low, corporate earnings are generally good, etc. Even the inflation remains low on an annual basis. So while this market move might have been exacerbated by an unexpectedly high monthly Consumer Price Index report, there is not yet evidence of a long-term trend of rising inflation.

The bottom portion of the chart shows a Moving Average Convergence Divergence (MACD). Notice that the blue MACD line is already near the -40 mark. That is lower than the levels reached during the most recent two times when the Nasdaq dropped below its 200-day SMA. That is an additional indication that this correction could reverse quickly.

The blue chip indices have not seen as steep a correction as the Nasdaq. Both the Dow and the S&P 500 are still above their 200-day SMAs. Both are down about 3% from their earlier highs in May.

This downturn in the major market indices is likely to create some changes in sector leadership. For now virtually every sector has corrected along with the major indices, including those that were trending well like energy and internationals. Even gold experienced a significant pullback, something one would not expect if higher inflation is a real threat.

For now, hang tight and watch for stocks to create a bottom. And when the Nasdaq crosses back above that 200-day SMA, be ready to make some money.

Have a great weekend.