The Nasdaq, the former bull market leader, has been wounded. Some say the matador was none other than the big investment banking firm Goldman Sachs (NYSE: GS), when early yesterday it told clients to sell a basket of commodities and stocks. Both stocks and commodities have risen to levels that could no longer be supported by tepid volume and mediocre breadth.
Today we look at a chart of the Nasdaq — and what we see is a broken bull.
Several important technical characteristics stand out on this chart. First, note the high in February at 2,840, and a lower high in April at 2,816. This is called a “double-top.”
Second, drop down to the bottom red arrow, the “stochastic sell.” This internal indicator flashed a sell signal several days ago. But internal indicators don’t stand alone. Their validity must confirmed by chart action.
Now look at the break yesterday of the important 50-day moving average (blue line) at 2,755 — this is the trigger. The combination spells a change in trend for this important leading index. The intermediate trend of the Nasdaq is now down from a double-top.
The question is where will the Nasdaq find its next meaningful support. By penetrating the 50-day moving average, the index will most likely fall to the bottom of its current range of support at 2,705. Since bargain hunters still abound, we should expect some backing and filling. But the chances are strong that the next support at 2,680 to 2,705 will be tested.
Yesterday, I said that today we would study a method of measuring advances and declines that has stood the test of time. But a significant trend change occurred yesterday, so we will put that study off until tomorrow.
It is clearly time to sell into rallies and take very defensive action. All but the very long-term holders of stocks should sell laggards and write options on long-term positions. The signal has been given and lower prices appear unavoidable.
For one way to profit from a sell-off, see the Trade of the Day.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
