Wednesday, September 30, 2009

NASDAQ Breadth Top-Heavy

The rude health of the Nasdaq has been evident by the strength from its internals; 74% of constituents are on point-n-figure buy signals, 71% are above their 50-day MA and an incredible 80% are above their 200-day MA. Such conditions can't continue forever so what should one be looking for?

During the depths of despair encountered over the latter part of 2008 the percentage of Nasdaq stocks above their 200-day MA languished below 10% for the best part of 5-months. The percentage of stocks above their 50-day MA enjoyed a brief rally from 10% to 70% before heading lower. While the bullish percents struggled to challenge the 50% mark.

If one was to flip this scenario on its head and apply it to the courent situation. the likely view going forward is the next 4-5 months will see the Nasdaq break lower with sizable downleg, perhaps taking it to a wide band of support running between 1,650 and 1,750. From there it will mount another challenge on September highs - possibly breaking through to continue the rally.

It's highly unfeasible the Percentage of Nasdaq Stocks above their 200-day MA will drop below 50% (this would require a crash-like move in the market); so expect this to meander in its upper range as stocks remain well above this key long-term average.

There is greater potential for a reversal in the Percentage of Stocks above the faster moving 50-day MA and Bullish Percents given the tight daily action of recent weeks will have set-up new point-n-figure signal-conditions and allowed time for the 50-day MAs to catch up with price action - making the latter vulnerable to breaks.

There is little to suggest the next major move down will not set-up another good tradable rally higher; perhaps overshooting a little past the 200-day MA. The May reaction low c1,664 is looking a good place for bulls to put up a defence. What happens on the second attempt at September highs will dictate market conditions going forward.

I have entered a Zignals Call for a push down to the low $33s for the QQQQ with a stop on a break of September highs.

Over the near term, look for the narrow action to continue until there is a decisive break of the Nasdaq 50-day MA.

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Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, stock charts, stock screener and stock portfolio manager website

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