NASDAQ NOT SHOWING MUCH BOUNCE -- SO FAR THE MARKET REBOUND HASN'T BROKEN ANY RESISTANCE BARRIERS AND HAS TAKEN PLACE ON LOW VOLUME
NASDAQ STILL HOLDS A KEY TO THE MARKET ... The technology-dominated Nasdaq has been a real problem for the broader stock market. The relative weakness in the Nasdaq since the end of the last year has been one of the big negative factors weighing on the market. If the market is going to pull out of its recent downturn, it's going to need a lot more help from the Nasdaq. So far it's not getting it. Chart 1 puts the 2005 Nasdaq drop in some perspective. The Nasdaq Composite has lost about two-thirds of its late 2004 rally and is testing potential chart support at 1900. A 62-66% retracement is often a crucial testing point for a market. If 1900 doesn't hold, there isn't much support above the August low at 1750.
Chart 1
A CLOSER LOOK AT THE NASDAQ ... Chart 2 shows the Nasdaq Composite Index over the last five months. So far, there's no convincing signs of a bottom. The fact that it's trading beneath its moving average lines is a sign of weakness. The last week's rally attempt has been relatively modest so far. If the Nasdaq is going to turn around to the upside, the first big hurdle it will have to overcome is an overhead resistance zone ranging from 1975 to 2025. It would have to also close above both moving average lines to reverse its current downtrend. Until it does that, it's hard to envision a serious market advance taking place.
Chart 2
ANOTHER LOOK AT THE S&P 500 ... Chart 3 shows the S&P 500 bouncing off chart support formed at last October's peak near 1140. The green horizontal lines also show the S&P finding some support at its 50% retracement line measured from the August low to the March high. As I suggested last week, the 1140 level was a logical spot to expect the S&P to bounce. And it has. Today's rebound has also put the S&P back above its 200-day moving average. At least for now, that neutralizes the bearish breakdown that we saw last week when it closed beneath that long-term support line. The question now is whether or not it can sustain its current rebound.
Chart 3
S&P TESTS JANUARY LOW... I wrote last week that the first layer of overhead resistance was along the January/March lows starting at 1163. The S&P reached that level today but didn't get through it. Even if it does, there's more overhead resistance in the 1170-1190 zone. It would also have to exceed its 50-day moving average to undo the technical damage done over the last month. Another factor working against the market is light upside volume.
Chart 4
NOT MUCH UPSIDE VOLUME ... The next three charts show the last week's rebound in the S&P 500 SPDRs (SPY), the Dow Diamonds (DIA), and the Nasdaq 100 Shares (QQQQ). They all have one thing in common. Upside volume has been light. That was especially true in today's trading. Volume is very helpful in telling us if the recent rebound is just a reflex bounce or the start of another upleg. Lighter volume on up days suggests the former. Heavier volume on up days suggests the latter. So far at least, volume has been lighter on the up days (green bars) and heavier on the down days (red bars). Chart 5 shows the SPY trading over its 200-day line and testing resistance at its late March low just above 116. Chart 6 shows the Dow Diamonds still trading under its 200-day line near 103. Chart 7 shows the QQQQ the farthest from its 200-day line. That makes it the weakest of the three market indexes. In my view, not a lot has changed since last Wednesday. The market has bounced off chart support and is now in a low-volume bounce. No overhead resistance barriers have been broken. The burden is on the market to pull itself out of its recent downturn. So far, it hasn't done so in convincing fashion.
Chart 5
Chart 6
Chart 7
