Editor's Note: We're focusing in this week on a weekly chart of the Nasdaq Composite
and comparing it to a daily chart of the S&P 100. By using multiple timeframes, we
aim to fully illustrate why this coming week is important.
For regular readers of the Daily TrendWatch, you'll recall that one of the Dow Theory
concepts is that, in reversing a bear market into a bull market, you have to make
higher highs right after making higher lows. The Dow Jones Industrial Average has not
yet done that. However, it is interesting to note the Nasdaq Composite has done that.
We can now see that March's lows were higher than October's lows. As of this week,
May's highs are higher than the January and December highs. Thus, one of the Dow
Theory's bullish criteria has been satisfied. The only problem is, it's been
satisfied by the Nasdaq Composite instead of the Dow (and the Nasdaq is a bit easy to
over-inflate).
Before countering with the argument that the Dow Theory doesn't apply to the Nasdaq,
let us say that we completely agree - they're two different indexes. But the idea
still applies. And considering that the Nasdaq typically leads the stock market's
direction, it's an encouraging sign. Now if we could just get the Dow to do the same.
For the Dow to satisfy this part of the Dow theory, it would need to get above
December's high of 9043.
But back to the Nasdaq. We adjusted Moving Average Convergence Divergence (MACD) and
stochastic charts for weekly data, and the results here are also encouraging. We are
finally getting MACD lines above the important zero level for only the third time
since September of 2000. And we're also seeing strength in that the stochastic lines
are entering overbought areas on the chart (staying overbought is not inherently bad
as it defines a bullish market).
What is not quite so evident on the weekly chart (which is why we're using the daily
chart for the OEX) is the resistance we just hit this very week. We barely made one
close above 1550 this week, and seemed unable to move above 1550 on an intra-day
basis for the other four days. What is incredibly striking is how close we came to it
each day without actually getting past that level (each intra-day high was within six
points of 1550). That sudden yet firm resistance is a cause for concern. Considering
we've been overbought for about three weeks, we may have finally found out just how
far stocks can go.
The bottom line is that with the convergence of support from the 10-day exponential
moving average (EMA) lines and the newly discovered horizontal resistance, something
has to give, and it has to give soon. As of now, with the current trend being
bullish, we have to side with the bullish camp as long as we get above 1550 this
coming week. If we don't do that, then we may finally get the expected retest of the
200-day moving average (in green). How the Nasdaq responds to that retest will be of
ultimate importance. Support is at 1490, resistance at 1550.
Weekly Chart of the Nasdaq Composite (COMPX)
S&P 100 (OEX) Commentary
The daily chart of the S&P 100 (OEX) clearly shows the horizontal resistance most of
the major indices hit this week. The OEX never got above 480, although made intra-day
highs within two points of 480 all five days this week. What is significant about 480
is not yet clear, as it wasn't a stopping point in recent history. All the same, it
is shaping up to be a resistance level that we need to keep an eye on.
Of continued interest is the support the indices are getting from their 10-day EMAs.
As long as these lines are rising like they are, the bullish trend will continue. But
like the Nasdaq (and every other index), something has to give when horizontal
resistance and rising support lines converge. This is going to happen soon.
By making higher lows, and the same intra-day highs, the implication is that we'll
keep poking at 480 until we actually move through it. Or to put it another way, the
strong support line will continue to be a bullish ramp for stocks. However you want
to view it, the current trend and/or the current chart pattern is bullish in the
short term. MACD and stochastics confirm the same for the OEX. Therefore, we're
cautiously bullish based on the OEX provided we can get above 480 this week.
Where the S&P 100 differs from the Nasdaq is that it has yet to break above
December's high of 487. This is certainly not encouraging to those Dow theorists
looking to apply the idea here. Failure to get above 487 has pretty bearish
implications, so all eyes are on charts right now. The Nasdaq chart is fully bullish,
the OEX chart is mixed, and the Dow chart (ironically) is the least bullish of all,
since it still hasn't gotten above its December nor its January high. With all these
mixed charts right now, the market is at a crossroads over the next few days.
Daily Chart of the S&P 100 (OEX)
The Bottom Line
We saw a slew of economic data this week - most of it bad. The economy can only
disappoint for so long until it catches up with stocks. However, we said the same
thing a couple of weeks ago, and the markets just kept rising. What may be different
this time is the sudden strong resistance levels that all of the indices hit. It
looks like we're at a pivotal juncture here, and stocks should start hinting at their
next direction soon. All the same, the current short-term trend is bullish, so we
remain bullish until we have a reason not to be.
Have a Great Trading Week Ahead!
Price Headley, CFA, President
With, James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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