NASDAQ Leads the Charge

Oct 8, 2007: 9:33 PM CST

Typically, when the ‘higher risk,’ more speculative stocks as represented in the NASDAQ index (which is geared more for technology stocks) lead in relative strength to the “Blue Chip” longstanding, steady companies of the Dow Jones, this strength has forecast higher prices for all (major US) Indexes in the short term. We are seeing this occur strongly now.

The NASDAQ technical picture (price relative to recent swing highs) is stronger than that of the Dow, and the relative strength value of the two indexes is rising in favor of the NASDAQ.

Typically, when this happens, it is a sign that big funds and investors are forecasting steady growth and they expect a higher return on their ‘trades’ through more volatile (risky) stocks than the steady Blue Chips.

It’s a good sign for the overall market, and we can perhaps expect higher overall index prices from here:

The NASDAQ:

Price is literally charging into six-year high territory, far eclipsing the swing high carved out in July before the mini-crash (doesn’t look so bad now, does it?)

The Index is making new momentum highs and new price highs, meaning future price highs are likely yet to come (new price highs often come after a retracement).

We are seeing a rising channel – a very strong channel – forming on the chart. I suspect the lower channel line will be broken first, but price may yet remain strong in the short-term.

Let’s compare to the Dow:

Price is not as high on a percentage basis above the recent swing high in July.

Volume is diverging (declining) with the rising channel in price – that’s bearish. Is volume flowing instead to NASDAQ based stocks?

A momentum divergence is forming, which doesn’t suggest a reversal, but rather caution and a slight retracement. It’s not a picture of strength.

And WHY might this be occurring? Let’s look at three charts briefly with minimal annotation:

Google (GOOG):

Apple (AAPL):

Research in Motion (RIMM):

What these charts are saying to me is one of two things:

  1. Price is seeing a euphoric extreme (but not likely)
  2. Price is forecasting higher prices to come, despite all the “bad news” from the media

Because price is king, we must read its signals. There are a lot of reasons to be ultra-bearish on the US stock market, but the US Stock Market doesn’t think so.

And when it comes to trading, that’s all that matters – price. It’s the only truth.

4 Comments

4 Responses to “NASDAQ Leads the Charge”

  1. Jonathan Says:

    Should be interesting to see if GOOG, AAPL, and RIMM ever roll over. They’ve already gone parabolic. I continually find myself routing for a long candle to the downside, slight retracement or consolidation and a crash…got to stop day dreaming.

  2. Corey Rosenbloom Says:

    True, I’m with you 100%. Psychologically – and personally – I cannot enter (long) at these prices, but because of my system, I really can’t go short either. I look for opportunities elsewhere, and may play (enter) any pullback, as any pullback to the rising 20 will cause an “Impulse Buy” trade to trigger (thanks to the new momentum highs).

    One can definitely short here, but it’s out of my comfort zone. I tend to stay away from highly volatile stocks anyway (that’s just me – I’m a risk-averse, ‘build wealth slowly’ trader).

    We’ll all be watching!

    Thanks Jonathan.

  3. Aaron Says:

    One of the concerns I have over the strength of the Nasdaq is that it does seem that some of its biggest cap stocks are pulling most of the load. The AAPL, RIMM, GOOG, AMZN, etc. group has been fueling a lot of the gains of late. I think it would be a good sign for the market if the Nasdaq can continue to see strength without these largest stocks always charging higher.

  4. Corey Rosenbloom Says:

    Aaron,

    True, the NASDAQ is far more weighted than the Dow or even the S&P, and the stocks you mentioned are indeed getting extended into the stratosphere, buoying the entire index. I need to go back and see which stocks are not participating – actually I need to view the entire NASDAQ 100 and get a sense from there. If the other stocks aren’t participating, then that would be a major divergence, and breadth readings tend to be more reliable than price readings.

    It’s an interesting situation, given the backdrop of negative news we keep hearing about recession, slowdown, financial doom, etc.

    There’s definitely a mental disconnect that is hard to overcome. I’m looking for the resolution soon.

    Thanks!