With the Nasdaq flirting with the possibility of yet another
Bull Trap, investors continue to hold their breath as short-term
bullish technical patterns begin to take form.
With the Inverted Head & Shoulders Pattern now clearly evident
within the Dow Jones Industrial Average, it is now time to turn
to the Nasdaq Composite for proper guidance regarding Internet
Securities. Ever since the 1619.58 low on April 4th, the clear
objective (without squeezing shorts) was for a retest of the March
28th's high at 1925. This 1925 did represent a solid pivot from
April 11th to April 17th before the Nasdaq's "neckline" finally
gave way before, during, and after the surprise Federal Reserve
rate cut that took place on the 18th.
When determining conviction, technicians first used the low on the
18th (1995.91) as a point-of-control. This level still has not
been tested, allowing a solid risk/reward scenario for bullish
investors. Nevertheless, once below 1995 shorts will attempt to
auction prices back underneath 1975 and wash out most weak longs
in the process (especially those who entered after the rate cut).
If these levels remain untested, the primary short-term objective
will be for a move back to the 2200 level seen on April 20th.
Regardless, the much-discussed 2254 low dating back to January 3rd
(1st rate cut) still has to be a more critical level.
Ancillary evidence that supports a move higher within the Nasdaq
(and definitely pulling the Internet and Semiconductor sector
upwards) is the crossing of the 10-dma above the 50-dma (2050 and
2020, respectfully). This bullish cross took place on January
25th; however, the market rolled over after roughly five sessions
and only marginally traded higher from levels witnessed during
the session in which this cross was verified.
Other bullish indicators can be found when drawing a trend line
from the 1619 low on April 4th through the 1710 low on April 9th.
This line bisects the chart at 2060, 15 points underneath Friday's
close, and should be reason for underpinning bids during trading on
Monday. Moreover, after the GDP report (see below), asset allocation
continued to flow out of fixed-income bonds and into more productive
equity securities (at least over the last trading week). With
yields on the 10-year bond testing the 5.31 percent level for
only the second time since January 25th, fund managers continue to
paint a picture of the Federal Reserve taking a more conservative
stance regarding the Federal Funds rate.
It was this stronger-than-expected GDP report for the first quarter
(2 percent annual rate versus expectations of a 1.2 percent increase)
that was the catalyst for the Dow to trade back above 10,800. With
consumer spending outweighing a drop in business investment and
inventories, an extremely strong 4.6 percent final sales figure was
left for economists to debate over. Moreover, the GDP deflator
significantly increased at a rate of 3.2 percent (from 2.0 percent in
Q4), while the Personal Consumption Expenditure (PCE_ price deflator
rose 3.3 percent and still manages to keep the rising trend intact
dating back to 1990. These are all reasons for the market to
experience underpinning strength at the expense of fixed income
securities.
Not helping matter was The University of Michigan's final
consumer sentiment index falling to 88.4 in April from 91.5
recorded one month earlier. Since November, the index has fallen
19.2 points, the biggest drop since July to October 1990, the
beginning of the last recession. Economists cited job cuts from
Cisco Systems Inc., Hewlett-Packard Co. and JDS Uniphase Corp. as
possible causes.
Consumer sentiment (due to increases in wealth) skyrocketed
when the Nasdaq rose from 1357 during the week of October 1st,
1998 to 5132.52 by January 1st, 2000. However, with the collapse
to current 2075 levels in roughly one years time, consumer
sentiment experienced a parabolic move lower and is now being
compared to levels seen during recessionary times. With such
swings in consumer sentiment, it only seems prudent to allow for
a significant degree of error when comparing to historic levels.
In conclusion, consumer sentiment (as a predictor of economic
expansion and contraction) may not be as precise nor as influential
in the eyes of Greenspan as previously thought.
With earnings season almost over, traders that hedged positions
over a possible increase in volatility will have no choice but
to unwind their position. With the Overall Volatility Index
(vix.x) losing six percent on Friday to levels underneath 28,
market participants seem to be clearly indicating that even
more risk will be taken if short positions are initiated. As
mentioned in previous issues, the volatility index will have
to eclipse 34 before shorts can sense fear, while a move
underneath 25 should confirm bulls are in control.
Continuing the theme of anecdotal evidence for new long
positions becoming profitable, MACD (on a daily chart) is
currently at levels not seen since February when the Composite
traded as high as 2656. Technicians call this a Bullish
Divergence, and should easily state the case that momentum has
finally turned back in favor of the bulls.
courtesy NB |
