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Nasdaq Overbought but Could Go Much Higher

Strong positive momentum should carry the index


Stocks closed mixed on Monday with blue chips, as represented by the Dow industrials, off slightly. The U.S. dollar continued to gain against a basket of currencies on news that Chinese economic data missed expectations. As a result, materials shares were lower and Alcoa (NYSE:AA) was the biggest blue-chip loser, off 2%. Health care, financials and consumer staples were winners, while Treasuries fell slightly, bringing the 10-year yield up 2 basis points to 1.925%.

At the close, the Dow Jones Industrial Average was down 27 points to 15,092, the S&P 500 was unchanged at 1,634, and the Nasdaq rose 2 points to 3,439. The NYSE traded 593 million shares and the Nasdaq crossed 367 million. Decliners outpaced advancers on the Big Board by 1.5-to-1, and decliners were slightly ahead on the Nasdaq.

Nasdaq Chart
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Trade of the Day Chart Key

The Nasdaq continued its march higher following the breakaway gap in late April. Monday established another new 14-year high, and since there is so little chart action to compare it to, it is not possible to estimate a target for the move higher.

Support rests at 3,330 and the 50-day moving average at 3,272. Even though MACD is overbought, strong positive momentum could carry the index much higher.

Conclusion: Despite Monday’s pause, the overall trend is for higher prices in all indices. Group rotation remains strong. Short sellers are running for the hills, according to a recent report by Nasdaq. And even the weekend’s Wall Street Journal piece on the Fed’s contingency plans to move to unwind quantitative easing failed to cause a correction.

A fundamental positive: By Friday, May 3, almost 1,700 companies had reported quarterly results and 59% topped earnings estimates, according to Bespoke Investment Group. In addition, 52% have beaten revenue estimates. Compared to prior quarters, those numbers are positive.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

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