CURRENT
TRENDS - Learning from the NASDAQ
The
current chart of the NASDAQ Composite Index
shows that the market has maintained an overall
long-term uptrend. It has, however, offered
a couple of strong warning signals:
- In late March
the Index broke down through its 50-day
Moving Average (MA) - in addition to breaking
through a long-established trendline --
followed by penetrations down through the
200-day MA from mid-April to the end of
May. The 200-day MA is normally considered
a good indicator of the long-term trend,
and any violation of that line is worth
noting.
- Then in the
beginning of June, the Index gapped up past
both the 200-day MA (blue arrow marked
'A') and the 50-day MA. (If you are
unfamiliar with the important concepts of
Support and Resistance please see the relevant
information on ChartFilter.com). A move
up through these MAs is normally seen as
a sign of strengthening markets.
- In mid-June,
however, the 50-day MA broke down through
the 200-day MA (blue arrow marked 'B')
- a sign that we're not out of the woods
yet. (Keeping in mind, of course, that Moving
Averages are lagging indicators and not
responding as quickly as many other indicators.)
What
next? How do we interpret this market? If the
50-day MA bounces back up through the 200-day
MA we have a further sign of strengthening.
Within the last week, the market did make a
break above current resistance at roughly the
4200 level and it is staying above its 200-day
MA (which is currently acting as support). The
market IS in choppy waters right now, however,
there's no doubt about that.
In terms
of basic trend analysis, the NASDAQ will be
showing increasing signs of strength if; a)
there's a strong break above the 4,300 level,
and b) the 200-day moving average continues
to provide support. However, if the Index once
again breaks down through the 200-day MA we
have a further deterioration of the long-term
picture for the NASDAQ and a definite sign of
weakening markets.
Why
did I choose the 50-day and 200-day MAs?
Because I'm interested in the long-term trend
in this analysis and the 50 day gives a good
idea of the mid-term trend while the 200-day
is a good indicator for the long term picture.
Shorter term MAs, such as 5, 10, 20 and 50-day
MAs, are more responsive to the market and can
be very useful for the more day-to-day trading
decisions. In looking at any particular stock,
however, I would strongly urge you to consider
the 50- and 200-day MAs to answer the question,
"Where's the mid to long-term support for this
market?"
Now
that you've seen how these MAs can be used,
why not take a look at some of the other indices
- DJIA, S&P300, TSE500 -- to see what they're
telling you about long-term strength or weakness
in the markets.
