Will NDX Confirm a Complete Shift of Market Stance as We Enter 2013?
If the November lows cannot hold and the longer-term neckline breaks, a measured move would put the NDX at ~2,050, confirming a shift in market stance.
Needless to say, it is very difficult to ascertain direction in a market where headline risk prevails and volatility is based on intra-day press releases. I liken investors’ emotional strife to August of 2011 when the PIIGS nations and the ECB controlled the tape. As such, the markets sit in a place which is hard to call unique, but is most definitely giving investors reason for pause as opinions on 2013’s economic direction are as bifurcated as ever. This is the primary reason that technical analysis is the principle matrix on which we lay our hats; disseminate risk within the noise.
Looking back to the March 2009 market bottom, the volatility has been unprecedented considering the 15-20% swings which have only been bolstered by QEs and Fed monetary policy. As of last week’s Fed meeting this has become even more unprecedented as policy is now tied to unemployment. Paul Volcker must be proud. Yet now we watch a market that is very long in the tooth, cyclically speaking, awaiting news which will assuredly affect the economic landscape for years to come. Technical analysis, in our humble opinion, is nothing more than a graphical interpretation of investor psychology as a whole, assisting in the determination of risk through the law of supply and demand. If this is a view agreed upon, times of risk are upon us once again. Today our focus is on the Nasdaq-100 (INDEXNASDAQ:NDX) market, the weakest of all 'four sisters,' both short and long term.
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The NDX, since the election, is one of the primary reasons our technical ‘risk’ stance has increased, and why we remain hedged in the portfolios we manage. As illustrated in the daily graph, you can see the November 7 gap-down open broke the intermediate term (~1-year) trend. It was here that the warning signs began. With hope of a fiscal cliff resolution and forthcoming Santa Claus rally, a decent Turkey Day week ensued as investors began searching for a bottom and shored up a 5%+ rally to fill the 11/7 gap. Over the last two weeks this has become a technical inflection point which will most certainly determine the action for the remainder of the year. The boundary lines are simply 2,700 topside and 2,600 on the bottom. Our increased risk conviction also stems from the MACD and Stochastic, which are both indicating, at minimum, a retest of the November lows.
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If 2,600 breaks and a retest of the November lows ensue, our larger concern is the longer-term trend. Even with the secondary vacillations of 15-20% over the last three years this trend has remained in place -- again, this can be mainly attributed to monetary policy and most assuredly not the economy. The technical condition, cyclically, is forming a topping pattern indicative of a longer-term top. The chart outlines a double top with a handle with a 2,450 neckline and ~2,850 top. If the November lows, assuming a short-term break of the aforementioned ~2,600, cannot hold and the longer-term neckline breaks, a measured move would put the NDX at ~2,050 and confirm a complete shift of market stance as we enter 2013. This will most likely shift the longer-term moving averages into a negative slope position (degree of accent or decent) and confirm such a stance.
There is much to play out over the coming weeks as investors still hold the hope of Santa, but thus far the sleigh has yet to get out of the barn.
This will be my firm's last article until 2013, and we at Tesseract Asset Management would like to thank all of our faithful readers. We hope you have a wonderful holiday season. We’ll see you after the turn.
I hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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