NASDAQ 100 RECAPTURES 1800 -- CISCO GAPS HIGHER -- INTERNET STOCKS TAKE THE LEAD -- NYSE AD LINE SHOWS BROAD PARTICIPATION -- USING THE STOCHASTIC OSCILLATOR -- NASDAQ OVERBOUGHT AND BULLISH -- DOW MIRRORS NASDAQ SITUATION
NASDAQ 100 MAKES A MOVE... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The Nasdaq 100 took the lead on Wednesday with a surge above 1800. This move reinforces support at 1750 and keeps the medium-term uptrend alive. Support around 1750 extends all the way back to resistance in January and April 2006. The index broke above this resistance area in November and broken resistance turned into support. There was a successful test in late December and today's move back above 1800 further validates the importance of support at 1750. The trend is up as long as this level holds.
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CSCO LEADS TECHNOLOGY STOCKS... Cisco (CSCO) led tech stocks with a gap and high volume advance on Wednesday. In fact, Cisco was the volume leader on the Nasdaq and even outpaced QQQQ. Cisco gapped up for the third time since August and this gap is bullish as long as it holds. The August gap was a breakaway gap that started the advance. The November gap was a common gap that signaled a continuation of the uptrend. Today's gap is bullish, but only as long as it holds and remains unfilled. Should Cisco moved lower and fill the gap, it would become an exhaustion gap and this would be a negative development. Right now the gap is there and I will cross that bridge when and if it gets filled. As far as the medium-term uptrend is concerned, there is a support zone around 26 from the November gap, late November low and late January lows. A move below this support zone would reverse the current uptrend.
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HHH BREAKS NOVEMBER HIGH... The Internet HOLDRS (HHH) was also hot on Wednesday as the ETF broke above its late November high. This ETF features Yahoo!, Ebay, Amazon and Time Warner, but not Google. On the price chart, HHH broke wedge resistance in mid January, head-faked lower and then moved higher the last two weeks. That was a pretty good head fake! The recovery after this dip was quite strong and the ETF is now showing relative strength. The August trendline and support at 52 hold the keys to the current uptrend.
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NYSE AD LINE HITS NEW HIGH... Even though the Nasdaq is grabbing most headlines today, we should not forget about the NYSE Composite. Both the NYSE Composite and the NYSE AD Line moved to new highs this month. The NY Composite is a broad index and new highs show strength. The AD Line is a key breadth indicator that measures the broadness of an advance. When the AD Line is relatively weak or sports a negative divergence, it reflects narrowing participation and this undermines an advance. A strong AD Line reflects broad participation and this reinforces an advance. A strong AD Line is clearly reinforcing the current advance in the NY Composite.
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USING THE STOCHASTIC OSCILLATOR... Before moving on to some weekly charts, I would like to talk about the Stochastic Oscillator. This momentum oscillator measures the level of the close relative to the high-low range over a given timeframe. For example, the 20-week Stochastic Oscillator reflects the close relative to the high-low range over the last 20-weeks. The closer the close is to the range high, the higher the Stochastic Oscillator. The closer the close is to the range low, the lower the Stochastic Oscillator. The indicator is considered overbought when above 80 and oversold when below 20. However, overbought is not necessarily bearish and oversold is not necessarily bullish. Securities can become overbought (oversold) and remain overbought (oversold) for extended periods. In the examples below I elected to use the 20-week Stochastic Oscillator with a 5-period slowing (black line) and a 5-week EMA as the signal line (red line). The 5-period slowing just means that a 5-period EMA has been applied to the Stochastic Oscillator for smoothing purposes.
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NASDAQ STAYING OVERBOUGHT AND BULLISH ... On the Nasdaq chart, the Stochastic Oscillator shows an index that is both overbought and bullish. The indicator moved above 80 in mid October and has remained overbought for almost four months. This is not unusual. Notice that the Stochastic Oscillator became overbought in late November 2005 and remained overbought for five months. The uptrend in the Nasdaq did not reverse until the Stochastic Oscillator moved below 80 and the Nasdaq broke support 2230. As the Nasdaq now stands, I would expect the current uptrend to continue as long as the Stochastic Oscillator remains above 80 and the Nasdaq holds key support at 2390. The advance has definitely slowed over the last 11 weeks, but we have yet to see an actual break down or trend reversal.
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DOW ALSO OVERBOUGHT AND BULLISH ... The Stochastic Oscillator shows similar results for the Dow Industrials. The indicator moved above 80 in mid September (a month earlier than the Nasdaq) and has been above 80 for almost five months. During this timeframe, the Dow extended its advance with new highs in November, December and January. Even though the Dow is overbought and ripe for at least a pullback, I would not bet on it as long as the Stochastic Oscillator remains above 80.
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