In the early innings of 2012, the Nasdaq was the trend-setter, the place to be for momentum investors and adrenaline-junkie traders alike. I cautioned investors for much of the rally that such a vertical move — especially when it’s more or less based on one stock (Apple) — will at the very least revert to the mean over time. I also noted that such a correction likely would be volatile, and that investors with weak hands would be forced to sell their long positions into the hole.
My cautionary stance has paid off, but it’s time to take another look at the charts. While I am referring to the Nasdaq itself, for technical analysis purposes I will use the Nasdaq-100 because it a) closely resembles the Nasdaq and b) lends itself better for technical analysis.
The correlation between Apple (NASDAQ:AAPL) and the Nasdaq-100 is unmistakably high and likely will remain so for the foreseeable future.
To get a bird’s-eye perspective of the Nasdaq-100, let’s look at a weekly chart. As of June 4, the index retraced exactly 61.8% (Fibonacci retracement) of the rally from mid-December to early April near 2,440, which also coincided with the 200-day moving average. In 2011, the Nasdaq-100 traded in a range between 2,050 and 2,440. Once the 2,440 level was broken to the upside in January, it was off to the races — but eventually that said breakout level was retested. The 2,440 area is of substantial significance.
While the recent lows on June 4 were notable, what still is missing for a better bottom is divergence between price and the stochastics oscillator on the weekly chart. When a price low coincidences with a momentum low, it rarely marks the real bottom of a swing.
At the same time, commodities play an important part as leading indicators, and they have yet to signal positive divergence (relative strength) to stocks. As such, stocks have further downside potential — and for the Nasdaq-100, that could mean it falls back into the 2011 trading range before finding better footing.
Last but not least, on the daily chart of the Nasdaq-100 there is notable resistance near 2,570, and if broken to the upside, the 50-day moving average currently at 2,630 might offer the next layer of resistance. A clear break above there would give the Nasdaq-100 a better bullish stance.