QQQQ: Bullish

Disclosure: I own March QQQQ calls but I have a few June puts.

Still consolidating... (NASDAQ)

Clearly volume has picked up as we have traded in the recent narrow range following the rising wedge breakout. I suspect the big boys can suck in a lot of buyers (short covering and buy stops) on a breakout of this range, so why wouldn't they? Lets see, but I still think this situation will resolve its self with a failed breakout (capitulation) before we begin any kind of real correction.

Disclosure: I have option positions on QQQQ.

All quiet on the nasdaq front (QQQQ)

Disclosure: I have no position in QQQQ but I am short some tech stocks like AONE, SPWRA and BIDU. I also own SPY puts to hedge long positions.

A Chart a Day #17: The Nasdaq Composite Weekly

Looks like a pretty convincing sell to me on this long term time frame. Note that if you use a logarithmic price scale, as I normally do, then the Nasdaq would have a little further to run before hitting the trendline that it hit on this linear chart. I did the linear chart because everyone seems to be talking about this chart and the trendline touch today only happened on this scaling. I think its a pretty low risk area to be scaling into shorts regardless, tech or otherwise.

Disclosure: I shorted TYH today, as a long term position.

A Chart a Day #7: Nasdaq Composite Breaks Out!

Nasdaq Monthly Chart

It seems silly to think that the Nasdaq has been in a bear market since the dawn of the new millennium (eight years) but thats sure what it objectively looks like on this 14 year monthly chart. To put things into context as we begin the third month of 2008 I thought it might be fun to look at some monthly charts, something I rarely do. In all cases you can see that the rally lasting the past five years is clearly over but the S&P 500 and Dow Jones Industrials made new all time highs during this time. The nasdaq on the other hand, got no where near its previous high. In fact is was almost 50% short of that high!

Now there isn't any grande realization I'm trying to discover here and the thought of an eight year old bear market is somewhat alarming. But looking at this chart and setting aside my feeling about the vast improvements in technology during this time, I'd say the last five years were a continuation pattern on a long term decline that began in March of 2000. Just for fun, lets call the recent break in the nasdaq the beginning of the second leg down. The first leg saw an 80% decline in prices which we can use to estimate the size of the second leg down. An 80% decline from the October highs takes us to around 450 on the composite index. Obviously thats crazy talk but it goes to show that this market could potentially fall very far. I'd guess we will head down near the average price in 2004-2006 around 1900-ish then who knows. Things are changing so rapidly with the economy its hard to keep up so I'll just let the charts tell me what to do. Right now the charts are saying things could get very ugly.

Disclosure: I own puts on QQQQ among other things

Failed Moves and the Major Indexes

I've noted here before that failed moves often lead to quick counter trends. A good strategy with the dow jones over the past few months would have been to take a position after a breakout or breakdown fails. The two most recent glaring examples are at the high in October and the low in November. The down broke above 14,000 to make record highs in late October but after it slipped back below 14k it dropped like a rock, 10% actually. More recently, the dow broke down when it closed below it's closing low made in August and also below its February high. Then in the following days the dow moved back above this level (which acted like support) and then we got this quick rally from the Thanksgiving low.

In order to trade this strategy you have to first establish where the significant price levels exist, then after a break watch for these levels to fail. Just as an example, lets say the dow broke it's high at 14,200. I would watch for the a move back below 14,000 on good volume then get aggressively short. These reversals suggest that big players took advantage of the obvious chart break to load up on or dump stock. When a major support level is breached many investors will exit their positions and traders will go short, this provides a huge supply of stock for institutions who may want to load up. When the break fails, the newly short get squeezed and investors who got shaken out may jump back in thinking they made a mistake. There are sound reasons why these failed moves would lead to fast movements.

You could also use this strategy with the 50 and 200 day simple moving averages. Since many investors watch these averages and expect them to be price support and resistance they can be considered significant price levels. Take a look at what happened the last two times the nasdaq 100 broke below it's 200 dma. Within a few days it reversed and that would have been the ideal time to go long:


You can also similar action on the dow jones chart up top back in August when it first broke below it's 200 dma.

Here's a look at the S&P 500. Theres not much to say other than that its been range bound for the past 6 months. A small inverted head and shoulders has formed which has a price target near the top of the range and hence new all time highs. Unfortunately for the bulls there are a number of resistance levels on the way up there and given the weak follow through on the 50 dma break last week, I doubt the S & P 500 will be able to hold on to recent gains.


You know I can't do index charts without including the small caps with a Russell 2000 plot. There is nothing bullish at all whatsoever about this chart. I've highlighted a few of the obvious points below like the down sloping moving averages and the lower highs and lows: