8:00 pm May 6, 2010:
Today’s market activity was incredible to say the least: Bids disappear, the Dow plunges 1,000 points and finishes down “only” 347, the U.S. Dollar skyrockets, Gold jumps and closes in on an all-time high, rioting breaks out in Greece, and a trader apparently hits a wrong button and inadvertently dumps billions (rather than millions) of something into the futures market. What the heck is going on here?
The best way, we believe, to sort through all the noise and the crazy talk right now and make some rational decisions about your investments is to focus on the CDNX. The Venture Exchange has proven to be an incredibly accurate leading indicator – perhaps the best one there is – of the overall markets and even the economy in general.
So let’s look at the BIG picture. The CDNX has certainly suffered some technical damage over the past four sessions, falling from a high of 1688 Monday to a low of 1554 today (the Index closed today at 1562). That’s a 7.5% drop. The Venture hit and closed just above the critical major support we identified earlier – the 100-day moving average (SMA) which it has remained at or above since early 2009 when this new bull market kicked in.
Our belief and hope is that support will hold at this critical level. It’s a very plausible argument that today’s panic in the markets was a bottom. We may very well look back at things in a month or two and wonder why we weren’t buying like crazy when the CDNX sold off to its 100-day SMA for the first time in many, many months.
Failure to hold support around current levels would suggest, however, that we could see a nasty correction from the 1691 high last month in the magnitude of 20 to 30% (normal, we stress, by historical standards – once every year or two – during CDNX bull markets), meaning a drop that could quickly take this market to a range between 1200 and 1360 before it moves back up again.
Right now the CDNX is on the edge. If it continues to plunge, the Venture would be signaling to us that a short-term world financial panic could indeed be upon us. But the good news is, this is not 2008 – overall, the CDNX remains firmly in a long-term bull market and even a 20 or 30% drop from last month’s high would not change that.
Below is a 10-year chart of the CDNX showing the 300-day SMA:
The CDNX 300-day SMA turned up late last year and is not about to reverse anytime soon, so the long-term bull market remains very much intact unlike the situation in 2008.
Note how in 2004, 2005, 2006 and 2007 the CDNX fell just below its rising 300-day SMA (often with dramatic but short-lived reversals of 20% or more) before turning back up and resuming its bull market run.
IT IS CRITICAL TO UNDERSTAND THAT WE ARE AT THE BEGINNING OF A BULL MARKET, NOT THE END OF A BULL MARKET.
So, to summarize:
The possibility of the CDNX holding support at current levels and starting a new uptrend is strong.
The possibility of the CDNX falling 20% or so from here does exist – but that would be a normal bull market correction by historical standards (one that we have already warned about here) and would also present one of the best buying opportunities of a lifetime.
Keep a close eye on the CDNX and stay calm and focused.
That is our “BIG” picture view. Refer to “CDNX Chart – Short Term View” for John’s excellent detailed technical analysis of this week’s developments.