Saturday, January 2, 2010

Nasdaq 100

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The last week of 2009 (see my previous "Light Volume Trading" on December 27, 2009), as I expected, was relatively flat and quiet.

Taking a look over the last month we may see that the DJI has been trading mostly side-way in the narrow 2.5% corridor (see my "DJI" post) since the middle of November 2009. The DJI has been trading above the upper line of this corridor just for a couple of trading sessions, yet on December 31, 2009 this index dropped back into its corridor range.

The S&P 500 index has pattern similar to the DJI trend. It advanced about 100 points (about 1%) above the upper line of its November-December side-way trading range and on December 31, 2009 it dropped back.

The NASDAQ 100 index was an exception from the DJI andS&P 500 indexes rule. In opposite to the rest of the indexes and the rest of the stock market, starting from the middle of December 2009, the NASDAQ 100 index advanced strongly.

Personally, I did not like this move on this index. It is a strange to see a rally on the single index while the rest of the stock market is hesitating in starting a correction down. The current behavior of the NASDAQ 100, DJI and S&P 500 indexes remind me the minimized variant events in 2007. If you open 5-year index chart you will see that the DJI and S&P 500 indexes stopped their up-move in May 2007 and these indexes where mainly traded side-way until the beginning of November 2007. The NASDAQ 100 index (in opposite to the rest of the stock market) continued to move up strongly until the beginning of the November 2007 as well. And then, in November 2007 strong correction started which then turned into strong down-trend which then turned into dramatic stock market crash.

Such stock market behavior could be explained in the way that after strong long-term up-trend (in period from June 2006 until May 2007) the stock market became heavily overbought and was ready for a correction down. The stock market was ready for a correction down in May 2007, yet the NASDAQ market sector still had a potential to move higher and still was collecting greedy buyers and delaying the rest of the stock market from a correction. Then in November 2007 when the NASDAQ sector has become heavily overbought as well and was not able to hold the rest of the market from the correction we had a beginning of a strong decline. It is another story that during this decline (in August-November 2008) the market discovered housing bubble in the financial sector and discovered that automotive industry oversupplied the market, which all lead to turning the strong decline into the strong stock market crash.

Right now we have some similar mini-version of the same events. Since July 2009 we have not seen any strong correction. Mostly positive trading pushed US indexes strongly up. There is a possibility that the indexes and corresponding stock market sectors has become overbought and are ready for a correction down, which would be very healthy. Yet, theNASDAQ 100 index continued to collect the buyers while the rest of the market was trading side-way. If the indexes are overbought and just waiting for the NASDAQ to reach its overbought top, then when it happens, I think we may face a stronger that usual correction down.

I am not stating that we may face another stock market crash. Stock market crash does not start suddenly in one day. A rule it starts from the strong correction down and if during this correction very bad news are revealed, than there is a possibility that the "very very very bad news" may turn a correction into crash.

Overall, despite the positive sentiment on the market, I am a little bit skeptical about further up move. Taking look at longer-term index charts you may find that many technical indicators signal strongly overbought levels. We have not seen any strong correction since the begging of the recovery after the crash (since March 2009). On longer term charts, the only noticeable correcting occurred in June 2009 (about 10% on majority of indexes). The NASDAQ 100 completely recovered from the crash by running above its September 2008 level. So, I think that the market should be at least a little bit overbought and it would be healthy to have a correctional move down... unless we are at the door of another bubble...

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