Indexes Trapped though NASDAQ Outperforms

May 15, 2008: 12:35 PM CST

The US Markets remain trapped beneath their 200 day moving average but above their rising 20 period average. A breakout is likely, but in which direction will it occur?

Let’s look at the SPY (S&P 500 ETF):

The 200 period average is declining while the 20 is rising, and price is in a strong uptrending channel line. Moving averages can serve as support and resistance, which is the situation currently, but one of these zones has to break – and I believe the break will occur sooner rather than later.

The SPY has support from prior price highs around the $138 (1,380) level, which also corresponds with the rising 50 period moving average. Price has already made a large price move up, so it is difficult to imagine it trending even higher, but the very fact that it is doing so is shattering many bearish expectations.

Let’s look at an interesting divergence within the NASDAQ Index and its QQQQ ETF:

The NASDAQ slightly resembles the technical picture of the S&P, in that price is finding support at the rising 20 and resistance and the falling 200. However, the QQQQ is actually stronger (technically) than the index itself because it has managed to close and trade higher than the 200 period average…:

Also, it’s interesting to note that the Relative Strength line of the NASDAQ vs. the Dow Jones Index has been rising (meaning the NASDAQ has outperformed the Dow since the March bottom):

This clues us in to potential risk-seeking (or greater risk appetite) by the larger players in the market. Also, one must take into consideration the impact that surging prices from Google (GOOG) and Apple (AAPL) has had on the NASDAQ index lately.

Let’s continue to watch these relationships for further clues as to what might be in store.

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