With certain tech stocks on a relentless tear since the June reaction low in the broader indices, I wanted to take a closer look at the Nasdaq Composite Index for perspective. What I found — to no great surprise — is an index trading at a critical level (resistance) through the long-term lens, and a medium-term slope that most likely isn’t sustainable at this angle.
To visually present this better, I drew a chart of the Nasdaq Composite Index looking back to the year 2000, which is where the index hit an all-time high closer to the 5150 area — still much higher than where the Nasdaq currently trades.
After bottoming in the autumn of 2002, the Nasdaq rallied sharply higher, only to hit a wall in late 2010 with the onset of the latest financial crisis. Despite a visually painful drop along with the rest of the market in 2008, the index managed to bottom in early 2009 at a relative higher low vs. the 2002 lows. This, from a long-term bottom-building perspective, is imperative to note.
The ensuing rally off the 2009 higher low this week has roughly hit the 61.8% Fibonacci retracement level of the entire selloff from the 2000 highs down to the 2002 lows. In other words, it took a little more than 13 years for the index to make good on just 60% of the cataclysmic decline from the top in 2000!
Closer up, on the daily chart of the Nasdaq, note that even during the May-June pullback, the index kept true to its November 2012 simple uptrend line. Since the June lows, the Nasdaq has now rallied almost 8% in a matter of 13 days, which seems a tad lofty.
This week’s breakout of the index past its May 22 highs looks good on the daily charts, but this is where the longer-term picture and hence the multi-time-frame analysis comes in handy.
Understanding that the Nasdaq is now at or very close to an important resistance area on the long-term chart, coupled with a very steep rally over the past two weeks, is to understand that odds on the long-side are deteriorating by the hour.