It is not surprising that the Nasdaq has finally begun to weaken, given the heroic move the index has made this year. As discussed earlier, the Nasdaq is bumping up against significant resistance at the 2000-2100 level. The brief penetration of 2000, accompanied by anemic volume, reveals a tiring market, in our opinion. The Dow behaves similarly around the 10,000 level, but is trading less “heavily” than the Nasdaq.
The Nasdaq’s internals are also showing signs of weakening. Breadth declines have dropped to the lowest levels since the rally began in March. Net new highs are the lowest in over six months. The advance/decline line has dropped below its 50 day moving average.
After the run we have witnessed thus far this year, the Nasdaq is entitled to a rest. Year-to-Date gains are 42.57%, while the trough to peak gains from the March lows to the recent peak is 49.82%. Since the October 2002 bottom, the market’s gains (to peak) are an eye popping 80.51%!
With the Nasdaq internals presenting the weakest overall picture since the market took off from its March 12th reversal day, it is prudent to expect some corrective activity, in our view. This divergence from recent price action – weakening internals and a new 52-week high – confirm this. As Technimental’s Kevin Lane observes, “Given the divergences in momentum and price, we are a little bit miffed the market hasn’t corrected some yet, but that is why you can’t fight the trend in price.”
We agree. The marginal break of the Nasdaq trend line and the drop below its 50-day moving average may not be as fatal as some have suggested. The tape has been resilient since the rally began, and these levels have been breached on at least 5 separate occasions. Those breaks were followed by a few indecisive days of trading, and then a smart snapback above the moving average. We could very well see the same movement occur now. What would be of greater concern to us is a new high accompanied by a strongly overbought condition, which might set the market up for a more serious 5% correction. But we have yet to see this combination of conditions occur all at once.
The trading action of the past few days has taken out layers of support, while filling in the gap from November 21st. Two remaining gaps – one from October 24th (above 1865), and an earlier October 2nd gap (above 1843) – are the next likely levels the Nasdaq could work down to. For traders, we would consider aggressively adding Nasdaq issues as the market approaches these support levels.
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“Securities pricing is, in every sense a psychological phenomenon that arises from the interaction of human beings with fear. Why not greed and fear as the equation is usually stated? Because greed is simply fear of not having enough.”
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