Research Excerpts

Technology Led The April US Broad Market Decline

Posted on: Tuesday, June 19th, 2012

The following (green highlights) is a reprint of our May 8th Asbury Alert, entitled Emerging Breakdown In NASDAQ Composite, in its entirety.  It is a good example of how Technology frequently leads upcoming US broad market direction, during both advances and declines.

Asbury Alert: Emerging Breakdown In NASDAQ Composite
Tuesday, May 8th, 2012

On April 9th our bias on the US stock market turned Negative, from a Positive bias on December 5th. This morning’s price activity in the NASDAQ Composite Index is in the process of verifying our Negative bias on the US broad market via an important minor trend reversal.

Chart 1 below plots the NASDAQ Composite (COMP) since March 2011 along with its 200-day (orange) and 50-day (blue) moving averages, widely watched major and minor trend proxies. The red highlights point out a new minor trend change that was confirmed this morning as the index peaked on March 27th, declined to test and hold its 50-day moving average on April 23rd but failed to establish a higher high, then broke down below the 2946 April 23rd low this morning.

Chart 1

A close below 2946 today would confirm a near term peak at the March 27th high and target an eventual 7% decline to 2750. Note that a decline to 2750 would effectively result in a test of major underlying support at the 200-day moving average, currently situated at 2736, which would present a major decision point for investors on whether or not the COMP’s larger October 2011 advance is still valid and intact.

Also note important underlying support at 2888 to 2879 (green highlights), which represents the May and July 2011 benchmark highs. This level, which represents a 2% decline from Monday’s (May 7th) close), is a probable first downside target for this emerging decline and a place that we would expect at least some temporary bargain hunting (buying pressure) to come into the market.

Bigger picture, however, our 2750 downside target (assuming a close below 2946 today) will remain valid and will be expected to eventually be met as long as the COMP remains below 3085.

Managers can participate in this strategy via the Fidelity NASDAQ Composite Index Tracking ETF (ONEQ).

The COMP closed below 2946 one day later, at 2935 on May 9th, to confirm near term peak at the March 27th high per our report above.  Our 2750 downside target was met  on June 1st, to capture a 196 point, 7% decline in just about3 weeks.  During that same 3-week period ONEQ declined by 7.12 or 6%.  The COMP actually bottomed a day later, at 2727 on June 4th, and has since rebounded by 6% into Monday’s (June 18th) high of 2903.

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