Email of the day (1)
"The Nasdaq 100 has now reached the same level as its pre-recession recovery highs. I wondered if you would share your thoughts as regards possible chart action going forward. I know you are not a fortune teller, although with a quality of information available, it sometimes feels like it. I ask only as one interested in the technical aspects which lie ahead."
Eoin Treacy's view Thank you for this question which others may also find of interest. Technology remains a Fullermoney theme because technological innovation is indispensible to the global economy. Given our increased reliance on technology, there is likely to never again be a time when the global economy can survive, let along growth without it. Innovation helps to introduce efficiencies that were not previously possible and therefore promotes economic growth. Competition is fierce in the sector but this is nothing new. New fields of innovation are constantly emerging and new companies still have the potential to grow from almost nothing to positions of global dominance. Facebook is but one recent example.
From an investment perspective, the Nasdaq and other technology-led markets such as Israel showed upside leadership following the 2008 crash. They bottomed early, broke out of their bases early, showed remarkable relative strength and are now among a small number of markets to surmount their pre-crisis peaks. At The Chart Seminar we teach that the most reliable continuation pattern is a consistent trend. Provided a trend remains consistent, there is no reason to doubt that it will not continue to move exactly as it has done. A consistent uptrend exhibits a rhythmic dominance of demand over supply which is reliable indicator of future performance for as long as it remains intact. Let's examine the Nasdaq's consistency characteristics.
The Index hit a manic peak in March 2000 and had given up the majority of its advance by the time it bottomed in 2002. The crash exposed the contradiction that helped fuel the advance which was that earnings didn't matter. In the cool light of reason we know that earnings do matter. Companies with a successful business model have survived and some have moved to positions of global dominance in their particular niches.
The Nasdaq-100, following an impressive rally from its 2002 low, trended steadily higher until early 2007 when it began to pick up pace. The latter portion of the advance was decidedly steeper and the clear downward dynamic in November 2007 checked the advance. It subsequently dropped below the 200-day MA, formed a first step below the peak, broke downwards in September 2008 and accelerated lower. However the Nasdaq did not represent the epicentre of the credit crisis. Its companies are much more leveraged to global growth than the domestic US economy and it was one of the first indices to break out of its base. Just as in 2002, it rallied impressively from its lows as short positions were closed and bargain hunters seized their opportunities.
The consistency of the staircase uptrend from March 2009 to the April 2010 peak was defined by relatively similar ranges, one above another. The Index, not unexpectedly, had a somewhat larger pause in the region of the pre-crisis peak but has since demonstrated that this was nothing more than a breather following a very impressive advance. Right now there are a number of potential outcomes.
The market has rallied consistently for the last four months, hit a new high and is somewhat overextended relative to the 200-day MA. No one could be particularly surprised if the Index consolidates above or in the region of the 2007 high, which would allow the MA to catch up. If this is to occur, it will break its short-term progression of higher reaction lows but remain above the 200-day MA. Alternatively, it could accelerate higher which would necessitate a trailing stop tactic for those long. However this would also greatly increase the potential for a lengthier pause when it eventually tops out.
If the Nasdaq has significant medium to long-term upside potential, as I suspect it does, the uptrend should remain consistent. Within what has been a very consistent move to date, this means that it should continue to find support in the region of the 200-day MA during occasional corrective phases.
In the meantime, at the very minimum a MDL stop (as taught at The Chart Seminar) near 2150 would need to be triggered to even begin to question upside potential.
Apple remains a leading share in the Nasdaq and its largest constituent at a 20% weighting. It remains in a consistent staircase uptrend and a sustained move below $310 would be required to trigger a MDL stop. Below $300 and the progression of higher lows would be called into question and below $270 it would take out 200-day MA and push back into the previous range. By that time, it would have lost the majority of its consistency characteristics and would probably have topped out over the medium-term. However, provided it remains consistent, the upside can continue to be given the benefit of the doubt.
Cloud computing has all the characteristics of the next big thing in technology. The "cloud" introduces efficiencies that allow companies and consumers greater flexibility at a lower cost. The companies most leveraged to this sector are outperforming in no uncertain terms. (Also see Comment of the Day on October 13th).
IBM consolidated in the region of the 2008 peak for most of 2010 allowing the overbought condition relative to the 200-day MA to unwind. It broke upwards in September, paused below $150 and while somewhat overextended at present, a sustained move back below $130 would be required to question medium-term upside potential.
Amazon broke upwards in September and continues to hold its six-month progression of higher reaction lows. The 200-day MA is currently near $150 and a sustained move below that level would be required to question medium-term upside potential. BMC Software shares the same pattern since August.
Citrix Systems pulled back violently in early October and continues to pause in the region of $70, allowing the overbought condition relative to the 200-day MA to be unwound. A sustained move below the MA would be required to question medium-term upside potential.
Check Point Software formed a textbook first step above its base which it completed in October. It continues to push to new recovery highs and is becoming quite overextended relative to the MA as it approaches the potentially significant $50 level. However, the medium-term upside can continue to be given the benefit of the doubt provided it continues to find support in the region of the 200-day MA.
Cognizant Technology Solutions continues to plot a rivetingly consistent progression of higher reaction lows, which would need to be interrupted taken out, with a sustained move below $60 to begin to question medium-term upside potential.
Oracle found support in the region of the 2008 peak from May and broke to new recovery highs in October. It found support in the region of the 200-day MA in December and would need to sustain a move below it to question medium-term upside potential.
Juniper Networks, following an impressive advance over the last six months is now testing the upper side of the 10-year base. A sustained move below the MA would be required to question potential for a successful upward break over the medium term.
Altera Corp has sustained a progression of higher reaction lows since December 2008. It has paused mostly above $35 since late November and a sustained move below $30 would be required to question medium-term upside potential.