NASDAQ Outperformance and Structure

Feb 26, 2009: 10:49 AM CST

I tend to focus mainly on the Dow Jones and S&P 500 Indexes, but what’s perhaps going unnoticed is that the NASDAQ Index has outperformed them both, having held above its November lows and is showing relative strength.

Let’s take a look at the Daily NASDAQ Chart:

Keep in mind, the S&P 500 tested its 741 November low and the Dow Jones broke it, hitting a 12-year low (the S&P missed a 12 year low by 2 index points).  The NASDAQ held 100 points (about 7%) above its lows.  Also, the NASDAQ is about 20% above its 2002 lows at 1,100 – that alone shows relative strength over the last few years.

Technology giants such as Apple (AAPL) and Google (GOOG) are well-above their respective November lows which is adding strength to the Index.  Other technology companies are holding their own throughout the upward correction in the market since November – some even have confirmed uptrends on their daily chart with prices trading above their 20 and 50 day moving averages.

If we look at the Relative Strength Line (Bottom of Chart), we see that the NASDAQ underperformed the S&P 500 until December when the ratio line broke a down-trend line (signaling the beginning of outperformance) and that trend has continued to this day.

Pairs traders can take advantage of such performance by buying the QQQQs and shorting the SPYs (or equivalents) to try to take advantage of over/underperformance, but that’s a whole other strategy that may not be appropriate for newer traders.

Generally, it’s a good sign for the market when small-caps and technology companies outperform the S&P 500, but we should take nothing for granted in the current environment.

Keep an eye on the NASDAQ and its Relative Strength Ratio for additional clues going forward.

Corey Rosenbloom
Afraid to Trade.com

3 Comments

3 Responses to “NASDAQ Outperformance and Structure”

  1. blues Says:

    You sure about nasdaq outperforming is good? Check this out, curtisy of Cobra’s blog…

    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2393449&cmd=show%5Bs141838753%5D&disp=P

  2. blues Says:

    Hm… that didn’t work, here’s the link again…

    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2393449&cmd=show%5Bs141838753%5D&disp=P

    If not just go to the page that say “QQQQ outperforms SPY good sign?”

  3. Corey Rosenbloom Says:

    Blues,

    Very good post – thank you for sharing. Try this link:

    http://tinyurl.com/6n8nox

    I’m not sure the reasoning behind that tendency but it’s quite clear from the charts recently.

    The fundamental theory (economic cycle) states that technology is a more volatile sector and so investors rush there seeking to outperform the market because volatile shares will rise faster in a rising market (and fall faster in a falling one) so any relative strength there *should* be a sign of investor optimism.

    That’s the theory I subscribe to at least. Cobra paints an interesting chart with a compelling short-term signal – a sell signal.