Thursday, March 26, 2009

Is The Current Rally In Stocks As Strong As It Appears?



Stocks were up today with the NASDAQ leading the charge with a gain of 3.6%. Transportation stocks were the big winners today up over 8%.

If you look at the above chart of the NASDAQ you can't help but notice the significant level of resistance we are now testing. In the lower pane is the NASDAQ advance decline line and as you can see there is a bearish divergence developing. Before I discuss this divergence, lets first walk through the last 6 months of price action.

Back in November, the NASDAQ made a higher high but the advance decline line didn't. This was a warning sign that a sell off is likely and that is exactly what happened.
On February 9th (point B) the NASDAQ was testing resistance at point A but the A/D line was diverging and once again the NASDAQ sold off. Now here we are at point C and the NASDAQ is testing resistance but the A/D line is diverging and making a lower high. This is a bearish sign just as it was in the previous two examples I just wrote about.

So here's is how I will trade this particular scenario. If the NASDAQ moves above resistance we'll probably see many of the trend followers as well as the breakout traders buying this market. That's fine as long as the market continues moving higher, however if the NASDAQ begins to head lower and closes below the trend line (blue line) I would interpret that to be bearish and a sign that the NASDAQ it about to head south.

Let's see what happens over the next few days as this key level is being tested in the NASDAQ. I do want to point out that the current short term trend is clearly up and there are no signs of weakness as of yet.

5 comments:

dacian said...

Thanks Kevin for this analysis. So let me check if I got this correct. If NDX moves above 1300, do you go long with a stop at 1250 for instance? If it closes below 1250, do you go short? thx

mr rolfsson said...

Very nice post... as always.

Kevin said...

Thanks Mr.Rolfsson,

Hi Dacian,

As you know I've been bullish since the lows so I'm not looking to buy the market up here. If resistance holds and the NASDAQ begins to turn lower breaking its trendline, I may consider shorting the Q's for a 50% retracement of the recent move up.

dacian said...

Kevin,

How did you obtain the chart above? I'm not good at all using stockcharts.com

I get something different
http://stockcharts.com/h-sc/ui?s=$NDX&p=D&yr=0&mn=6&dy=0&id=p37504491101

What do you think about Friday's movement? NDX didn't break through resistance but neither the diagonal support; it seems yet to loose steam.

thx

Kevin said...

Where you typed NAAD look two spaces over to the right and select "cumulative" from the drop down menu.

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