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A week ago I wrote that in spite of any recent progress, the market’s upward trend remained intact. The next day (Friday) I was at an expo event for senior citizens and was distracted all day by the plunging Dow. I worried that the advice I’d given might no longer be valid. I worried because I don’t like to try to predict market movement because I understand the futility of such efforts. I also worried that there might be additional sharp follow-through on the downside, which so far has not been the case.

With the perspective of an additional week, I am glad to say that last week’s advice is generally still valid. Much of Friday’s losses were recouped earlier this week. In spite of the downward movement, technical indicators remain positive for stocks at this point. But remember that technical indicators generally lag the market. In other words, they tell us what has been happening rather than what is likely to occur.

Perhaps the most important lesson to be learned from Friday’s action is that many traders and investors are very nervous. They are standing by the exits, ready to rush out at any sign of trouble. That means we need to be cautious, because even if technical and fundamental indicators are strong, we could get trampled by other investors trying to get out.

The chart below gives a good picture of the current situation. The black line on the top portion is the daily price action of the Nasdaq. The gold line is a 50-day moving average (MA). Notice that the Nasdaq isn’t even close to its 50-day MA. If we were on the verge of a serious correction, we would normally see the Nasdaq penetrate below that line within just a few days. Instead, this correction still seems to be moving generally sideways, albeit with some increased volatility.

On the bottom two portions of the chart we see a moving average convergence divergence (MACD) and a relative strength index (RSI). Although the RSI is right at the 50 level, both of these indicators remain positive for now.

So even though Friday’s drop gave us a bit of a scare, the best advice for investors right now is to continue to hold long positions because the long-term upward trend is still in force.
F.S.