The recent slide in European stock markets has not signaled the turning point in the four-year bull run, chart analysts say, but stocks could struggle to recover those losses in the short term.
The FTSEurofirst 300 index of top European shares has fallen about 7 percent from the six-and-a-half year highs established three weeks ago, as widening credit spreads have raised concern about companies' future ability to finance merger activity and triggered a spike in volatility.
The big worry is historically, in terms of bull markets, it's quite an old bull, said CMC Markets analyst David Jones.
Markets that have been going up for this long tend not to last for too much longer ... but at the moment, as long as we hold above these levels, it's still positive, he said.
The charts have flashed short-term warnings this week.
Wednesday's 2.5 percent fall to a four-month low of 1,511.24 points in the FTSEurofirst 300 sent the 10-day simple moving average through the 100-day average, often a bearish signal for trend followers.
The index has this week also convincingly broken the 200-day moving average -- 1,529.2 on Wednesday -- and this is an event that has only taken place three times in the last four years.
We can see why people are bullish right now, but we're probably still cautious, said Gerry Celaya, a technical analyst with Redtower Research.
We use the 250-day moving average, and 250 has not even been approached yet. We are saying the upside should find key resistance, he said, adding that a break below support in the form of the trendline that runs from June 2006, could see the FTSEurofirst move right back down to 1,430 or 1,420, another 5 percent below current levels.
The index is also nudging the 61.8 percent Fibonacci retracement that runs from March's low at 1,427.39 to July's six-and-a-half-year high at 1,635.58. The Fibonacci sequence of numbers, in which each new number in a sequence is the sum of the preceding two, is widely used in financial chart analysis.
Is that really the right retracement to look at? If you think this is a small retracement, then fine, 61.8 and away we go. But if you are thinking, 'Hang on, this kind of move is probably the end of the move from 2003,' that kind of changes things, Celaya said.
This longer-term view suggested the downside potential for the FTSEurofirst 300 could extend all the way back to 1,270-1,260 -- the location of the 38.2 Fib level from the rally between June 2003 and the July 13 high, he said.
Fundamentally, analysts say the bull market is still sound. Economic growth is bolstering corporate profitability, and while credit spreads have leapt this year, liquidity is ample after several years of low global interest rates.
So most strategists say the current sell-off is over-extended.
The relative strength index (RSI), which measures the momentum of price changes, is hovering around an oversold 31. On two occasions so far this year when the RSI breached the 30-mark, a level below which chartists expect a steep price fall to stabilize, the FTSEurofirst 300 subsequently bounced back.
In a note this week, UBS noted the breach of the 200-day moving average offered a clear buy signal.
If we exclude the 1998 event, when a sovereign nation defaulted, previous bull market corrections have averaged 8.4 percent. Other indicators, such as the increase in VIX, are also in line with the average for previous bull market corrections, UBS analysts said in a note to clients.
The VIX, which measures volatility in options on the Standard & Poor's 500, often dubbed Wall Street's fear gauge, has risen to its highest in over four years.
The dip in the index below the 200-day moving average has persuaded some investors that the market correction has reached a trough.
The falls of the last few days have made us very bullish, and we've increased our equities exposure in our more aggressive portfolios, said Dan Kemp, a fund manager who helps run Williams de Broe's 2.6 billion pound portfolio.
We've taken 4 percent out of our cash position ... and put it into European and Japanese equities, he said, adding the break below the 200-day moving average had helped influence the decision to buy.