Technical analyst Ralph Acampora at Prudential is quite bullish on the NASDAQ, and he estimates that the tech-laden barometer will surge to between 2,300 and 2,500 by the end of this year. This represents additional gains of between 5.70% and 14.89% and would see the index finish the year up between 5.73% and 14.92% from the current level.
My view on the NASDAQ is more conservative, but, based on the current technical picture, there is clearly a positive bias towards tech and growth stocks.
I believe the remainder of the summer will be relatively lackluster, but I do expect a pickup in trading activity in September, as we saw in 2004.
After showing a bullish double-bottom formation on the charts in April, the NASDAQ has rallied from 1,900 to nearly 2,200, breaking to a new 52-week high of 2,193.19 on July 21, 2005.
What has been encouraging is that we’re seeing buying despite market uncertainties. Fundamentally, I have been impressed with the fact that stocks have managed to shrug off the bad news and focus on positive market news. In my view, this reflects a bull market. But before you jump in headfirst, however, there are some cautionary notes that you should be aware of.
First, take a look at the new-high/new-low ratio (NHNL) for the NASDAQ, which has been strengthening since mid-May. In the last 48 sessions, 45 were above 1.0 and the 12 of the last 13 sessions saw a reading above 5.0, including four of the past five at above 10. The rising NHNL suggests increased optimism towards tech and growth stocks from the mass populace.
Take a look at the moving averages for the NASDAQ NHNL ratio. On a bullish note, the NHNL five-day MA for the NASDAQ of 9.99 has broken above the 10-day, 30-day, and 50- day MA of 8.04, 5.43, and 4.01, respectively. The 100-day MA is a lowly 2.30. This reflects positive sentiment.
As far as the near-term technical picture is concerned, it is bullish and continues to point to additional gains. But be careful as the Relative Strength is showing some weakness.
Breadth as indicated by the advance-decline line continues to be positive with the five-day MA at 1.26, above the 30-day and 200-day MA of 1.17 and 1.13, respectively. But, again, be on guard, as the daily readings are showing some minor weakness. In the last 10 sessions, seven days saw a positive advance- decline line, but, during that stretch, the NASDAQ gained a mere 30 points.
The index is trading above its 20-day MA of 2,126 and above its 200-day and 100-day MA of 2,050 and 2,036, respectively. Watch if the index can hold and take a run at 2,200. Above this is resistance at the 14-day 80% RSI at 2,264 followed by 2,300. These are the technical targets. A break at 2,300 could see the index approach 2,400 to 2,500 if the momentum continues. The index may take a breather before staging another attack towards 2,200. A decline to 2,100 could be a buying opportunity if the index holds.
Continue to watch the trading volume on both the up and down days to gauge the market’s sentiment. A rise in the market in conjunction with reduced trading volume is a bearish divergence. Trading volume was relatively low from February to June, suggesting caution. In a bullish market, you want to see rising volume on up days and declining volume on down days. Trading activity subsequent to January has been relatively low. In the 122 sessions since, daily trading was below two billion in 105 of the sessions, but volume has been picking up. The five- day MA of 1.79 billion shares is above the 10-day and 30-day MA of 1.69 billion shares.
Now, take a look at the CBOE NASDAQ Volatility Index or VXN–a barometer of near-term market volatility based on NASDAQ 100 index option prices–viewed as a contrarian indicator. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top. The VXN has been declining in recent weeks, suggesting a potential market top. The five-day VXN to July 26 fell to 13.29, below the 30-day MA of 14.31 as well as the 50-day and 200-day MA of 15.02 and 17.874, respectively. This declining VXN suggests a near-term market top.
So what do you do? If you are buying, trade momentum stocks only, if you can stomach the risk. You should always have a stop-loss to help protect against a market reversal. If you are shorting, be extra alert, as market momentum is a killer for shorts. Make sure you have stop-buys.