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Retracement ?

Posted By Barry Ritholtz On January 23, 2004 @ 7:04 am In Finance | Comments Disabled

I always find it interesting when people from different disciplines arrive at similar conclusions [1]. Earlier this week, Alan Farley (author of “The Master Swing Trader [2]“) made this observation regarding how most of the major indices have retraced to their post 9/11 highs:

“The table shows three of the averages moving together and rapidly approaching their recovery highs. But the Nasdaq 100 is the odd man out, underperforming the other indices by a wide margin. The most likely reasons for this divergence are twofold: First, index behemoth Microsoft (MSFT) still trades 30% below its recovery high. Second, the keepers of the index rejiggered the components during the bear market, and its lower tech weighting is now undermining its performance.”

Market Retracement (as of 1/14/04)































Index Post-Sept. 11 High Jan. 16, 2004 High Difference
Dow Industrials 10,673 10,601 -72
S&P 500 1177 1140 -37
Nasdaq Composite 2098 2140 +42
Nasdaq 100 Index 1734 1554 -180

Source: Real Money.com [3]

Farley also notes how Fibonacci numbers play into the retracements:

FIB.bmp
Source: Real Money.com [3]

“Given the 100% retracement magnet, will the Nasdaq 100 play catch-up with the broader Nasdaq Composite that has already exceeded its recovery high? Or is it destined to come up short when the market finally turns? Last week’s re-emergence of the 1990s bubble plays may offer important clues.”

I also find his description of the stage the rally is at — by seeing which stocks happen to be finding the most action — to be persuasive:

“Rally expansion into secondary-tier stocks has an upside and a downside. On one hand, it warns us that traders are having a tough time finding stocks that have genuine prospects or that represent good value. Alternatively, the expansion provides a whole new set of trading opportunities as the market’s mangiest canines pop out of long-term bases and into multiweek uptrends.

It also suggests the rally is maturing quickly and will soon give way to a corrective environment, whether through a sideways pattern or a steep pullback. Of course, everyone has been waiting for this correction to start for weeks now, so it won’t be a surprise when it finally appears.”

All told, a very interesting take on the matter.

Sources:
As the Rally Expands, Who Let the Tech Dogs Out? [3]
Alan Farley
RealMoney.com, 01/20/2004

http://www.thestreet.com/p/_rms/rmoney/theswingshift/10137734.html


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URL to article: http://www.ritholtz.com/blog/2004/01/retracement/

URLs in this post:

[1] conclusions: http://bigpicture.typepad.com/comments/2004/01/market_flashes_.html

[2] The Master Swing Trader: http://www.amazon.com/exec/obidos/tg/detail/-/0071363092/ref=ase_thebigpictu09-20/002-2267231-0348809?v=glance&s=books

[3] Real Money.com: http://www.thestreet.com/p/_rms/rmoney/theswingshift/10137734.html

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