Nasdaq may be at start of long bottoming process
By Brad Schade
CHICAGO, Dec 8 (Reuters) - The Nasdaq Composite stock index (^IXIC - news) may be at start of a long bottoming process, technical analysts said, but the outlook for other major U.S. stock indexes is less clear.
The technology-laden Nasdaq index has lost about 43 percent of its value since in its high close of 5,048 on March 10, and the drop over the past eight months has occurred in extremely volatile trading conditions at times. The index was trading around 2,887 at midday Friday, up nearly 5 percent from Thursday's close.
Its volatility has led many investors to expect an equally volatile turnaround from the long decline, but such a sharp change of direction, sometimes called a ``spike'' bottom or ``climactic'' selloff, is unlikely, technicians said.
``I don't think this is the type of market decline that has a one-day turnaround bottom,'' said Todd Gold, vice president of technical research at Gruntal & Co.
If the bottoming process has indeed started, it could take well into the new year before it is confirmed and possibly until mid-year before prices head decisively higher, chartists said.
``We're waiting for the charts to show us that they want to stop going lower -- not necessarily turn around and start going up, but just a slowing of the downward momentum,'' Gold said.
Gold said daily charts of Qualcomm Inc. (NasdaqNM:QCOM - news) provide a good example of such a bottoming process, forming a base over four to five months in a sideways trading pattern......[MY NOTE: I have been thinking that the market may well follow the trend that QCOM followed.... QCOM rolled over & corrected before the rest of the market & might be indicative of how the market recovers - BWDIK]
Picking a bottom in such volatile trading conditions could be a risky proposition, and investors might be best served by taking a wait-and-see attitude, chartists said.
``Our basic feeling toward the market is that the key to navigating the intermediate term is simply to have the patience to let the process play out,'' said Greg Nie, technical analyst at First Union Securities Inc.
One technical indicator that has proven reliable for the Nasdaq Composite in the past, Nie said, is the distance from the index to its 200-day moving average, which is at a historic level of about 24 percent.
``It's only the fourth episode in the entire history of the Nasdaq Composite where the Composite has gotten more than 20 percent below the 200-day moving average,'' Nie said.
The difference was matched only by the spread evident during the market decline of 1974 and is currently greater than ones in 1987 and 1990 when the index was also more than 20 percent below the 200-day moving average.
In those three episodes the market went through a base-building period of about two months and then took another one to three months to get back to the 200-day moving average.
``It looks like we're very early in that process. We're simply looking for history to repeat itself,'' Nie said.
Nie said the lows the index put in last week might stand a better chance of holding than the lows of the prior three months, ``from the perspective that apparently we now have a kinder Fed.''
Signs of weakness in the economy have led many economists to expect that the Federal Reserve will abandon its credit tightening bias at its policy making meeting on December 19. Fueling such sentiment were Federal Reserve Chairman Alan Greenspan's comments early this week that the economy has lost momentum and that the central bank needed to be alert to the risk of falling stock markets that could prompt ``excessive softening'' in household and business spending.
Alfred Goldman, technical analyst at A.G. Edwards and Sons, points to a change in mood after Greenspan's remarks, noting that negative news from companies is not having a consequent negative impact on share prices.
``The biggest problem this market has had since Labor Day is concern that maybe we would slip into a recession and corporate earnings would get flushed down the toilet,'' Goldman said. After Greenspan's comments, he said, the chance of a recession is only about 1 in 10.
On a contrary basis, Goldman said there are also signs of a reversal. ``There's been a spike up in analysts' downward revisions to earnings forecasts, which is a classic sign of a bottom,'' he said.
Goldman said the turn should apply to all indexes, but analysts are less clear about expectations for blue chip indexes.
The Dow Jones Industrial Average (^DJI - news), near 10,730 at midday Friday, is approaching a trendline that dates back to 1994 and now comes in slightly above 10,000 on weekly charts. As long as the index remains above that line, the market is still in a long-term uptrend, chartists said.
Nie also noted the possible formation of a distribution top in the Dow formed over the past year and a half. A trendline from the closes on days when the market set significant lows on daily charts in March 1999 and March 2000 comes in a bit lower than the long-term trendline, near the 9,800 level, he said.
``With a close below 9,800 or lower, you're going to be in trouble,'' Nie said.
In addition, recent weakness in bank and financial stocks, which have an impact on blue-chip indexes, could also be key in the future direction of broader-based indexes.
``If banks fall apart and break down, that will be a real negative,'' Gold said. ``Without cooperation of those stocks, more S&P stocks will have trouble.''
A break below 800 in the Philadelphia Stock Exchange's bank index (^BKX - news) would mean more downside pressure for the banking sector, Gold said. ``If it can hold on, that bodes well for the rest of the non-tech market.'' The index was near 852 at midday Friday.
Pressure from the banking sector could drive the S&P 500 stock index (^SPX - news) closer to a key long-term trendline from the lows of July 1996 and lows at the beginning of the fourth quarter of 1998, which comes in near 1,300 currently, Gold said. The S&P 500 index was around 1,369 at midday Friday.
``If the S&P gets under 1,300, it's a break of a long-term trend,'' he said.
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