What Is the Nasdaq Composite Telling Us?

 | Apr 03, 2012 | 3:00 PM EDT  | Comments
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Last week the Nasdaq marked the low for the move when it pulled back on Thursday to a low of 3069.81, neatly aborting its bullish island reversal from last Monday but not quite filling Monday's opening gap at 3067.92.

As I reiterated in Thursday's column, that is often the pattern we find at market bottoms. An island gets aborted, but a sliver of the original gap remains intact. That's what we saw on Thursday and from there it's been back up to new highs. At least new highs in the SPX and Dow, but so far, at least, no new high in the Nasdaq. And that's no new high despite the spike to new highs in Apple (AAPL) and the corresponding rise in the Nasdaq 100 to what for the moment looks a lot like a triple top.

This morning's slight high in the NDX of 2794.36 is just fractionally above last Tuesday's high of 2793.44 and Wednesday's slightly higher high at 2794.00. For the moment, at least, it's a triple top in the NDX and a lower high in the Comp. If that doesn't strike you as a bit worrisome for the near term, maybe it should.

 

Nasdaq Comp -- No New High Here
Source: optionsExpress

 

If the Comp takes out its recent highs at the 3134 level, then that would be a positive sign for the near term as all three major averages will have scored new highs on this move and that would erase that little non-confirmation. But I won't be adding to my positions at this level. In fact, yesterday at the close I took some chips off the table in the SPX and Dow and Precious Metals Funds at Rydex, now Guggenheim Investments.

So, I am not a buyer in this area, but, as usual, I will be on the lookout for pullbacks to buy.

As for what levels, that depends on the index. But suffice it to say, there are plenty of unfilled gaps from the recent rebound that will give me some guidelines.

In the Dow, there is a gap at 13146 from last Friday's higher opening. Of note, yesterday morning's pullback to 13154 looked like it might have been headed there, but it didn't quite fill the gap and from that low popped up to new multi-year highs, just shy of the next round number at 13300. The high of 13297 was just eight points above the prior high and three points from that next century mark. For the moment, that next century market at 13300 is resistance, and support is the gap from last Friday. For the short term I like selling into that 13300 area and buying at Friday's gap.  

 

Dow -- Stalling at the Next Century Mark
Source: optionsExpress

 

Then there is the SPX which is getting closer to its gap from way back in May of 2008 (as shown below). That gap runs from 1424.49 to 1426.63. I wonder if perhaps yesterday's pop to 1422.38 was close enough. Maybe, but probably not. Speaking of gaps, it's noteworthy that this morning's lower opening left another little gap in the SPX. The gap is at 1419.04 and it's an initial objective for a pop back up.

 

SPX -- Closing in on its May 2008 Gap
Source: optionsExpress

 

Finally, there is the Russell 2000, which continues to lag the major averages, though yesterday had a big day as it popped back up over 10 points (more than 1%) to the 840.63 level. This morning, it has moved fractionally above yesterday's high, but still well shy of last Tuesday's multi-month high just below 848.   

Russell 2000 -- Still Going Nowhere
Source: optionsExpress

On the indicator front, it's a mixed bag as the market isn't even close to overbought at least not according to the McClellan Oscillator which settled yesterday at a muted -4, pretty close to neutral. Of course, as I've been saying for a while, this indicator is being distorted by the selloff in the bond market. So that has to be factored in. On the other hand, taken at face value, the indicator is giving us another in an endless series of glaring non-confirmations as the averages score another series of new multi-year highs against a negative reading in this oscillator. That's pretty ugly from a momentum standpoint. But of course, this has been going on for months.  

Sentiment also remains problematic as evidenced by the pullback in the VIX. Only good news here is that the VIX hasn't scored new multi-year lows on this trip to higher highs in the averages. It's not much but it's something.

 

VIX -- No New Multi-Year Low
Source: optionsExpress

 

Seasonality is quite favorable through the end of this holiday-shortened week. On the other hand, the release of Friday's nonfarm payrolls while the stock market is closed is likely going to weigh a bit on those holding long going into the three-day weekend. Odds are good that some folks will want to take some chips off the table before Friday. And I don't want to be the last one to leave the party so I am cutting back into strength, given the opportunity this week. Currently back to a maximum of 45% invested after selling some positions at yesterday's close.

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