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Relative Strength Analysis: Nasdaq vs NYSE stocks



Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

One of the most valuable features of the Bloomberg for us is the ability to create custom indices. That is, create an index that is a mathematical construct of several other indices or baskets of stocks. We do this with some regularity, looking at, say, the DOW vs the price of gold, or oil prices vs gold price, or the SOX index versus the NDX.

The reason we do this is that we have found that Elliott wave/Fibonacci analysis of these "composite" indices is just as valuable as their respective constituents. The logic being that, if Fibonacci/Elliott wave counts can work for the SPX, INDU, NDX and the SOX, then it should work too on, say, an index composed of the SPX divided by the INDU, or an index of the SOX index divided by the NDX. Worthwhile too is the ability to look at traditional technical analysis metrics: momentum and channel trendlines.

Unfortunately the Bloomberg cannot create such custom indices with candle charts (with an open, high, low, and close price): as a result, Demark indicators, which rely on these data points, are not applicable. That said, Elliott wave, Fibonacci, and some traditional metrics tend to provide enough insight that we can come to some conclusions. And there are times when those conclusions can help our more focused work on the big indices we follow.

To this end, we have a custom index that we have been following for the last year: it is a chart of the Nasdaq Composite index (CCMP) divided by the NYSE index (NYA). Why the CCMP/NYA index? At its most basic, the Nasdaq has been, at least for the last decade, an index that tends to "lead" other indices given its relative beta.

From the 2002 peaks, the NDX dropped 78.4%, where the NYA dropped a mere 38.3%. And from the 2002 lows, the NDX gained 94.3% where the NYA gained 54%. The old saying on Wall Street is thus: as goes the Nasdaq, so goes the market. At least that's been true for the last decade or more. So the logic of charting a graph that looks at the CCMP over the NYA will attempt to determine when the Nasdaq is outperforming (and thus bullish for all the other indices) or when the Nasdaq is underperforming (and thus bearish for all the other indices).

The analysis looks at two daily charts of our custom CCMP/NYA index, the first chart from the Q1:04 peaks to present, and the second chart from the June 2004 peaks to present. The longer term chart shows a clear developing impulsive Elliott wave down from the Q1:04 peaks, where wave III is underway (and extending) that could find a good bottom sometime toward the end of this year or the first month of 2005. The daily momentum profile of this move down from the January peaks is confirming this "count" as are the Fibonacci relationships between the so far developed waves. Parallel channel trendlines and the fact that down moves are clearly impulsive (not overlapped) while up moves are clearly corrective (very overlapped) also help to confirm this as the most acceptable "count".

Though it won't necessarily be a straight line down, the analysis suggests the Nasdaq stocks to generally underperform the NYSE-listed stocks until sometime in Q2:05 +/- 2 months, when a more lasting bottom for the Nasdaq names could be found and the first large impulsive wave off the January 2004 peaks could be complete.

The second chart looks at a more recent view of the same index. From the June 2004 peaks to the August 13th bottom the index dropped very impulsively, and in a little over one month, the Nasdaq stocks significantly underperformed the NYSE- listed names. From the August 13th lows however, this index has been very overlapped and, in Elliott wave terms, has traced out a double zigzag (labeled ABC-X-ABC), where the first zigzag (8/13 lows to 9/20 peaks) is almost precisely equal to the second zigzag (9/28 lows to peaks yesterday on 10/18) at yesterday's peak. Note too on this close-up daily chart that the MACD histogram has been weakening meaningfully with each "thrust" upward in this index, first in late August, then in mid September, and even weaker in early October and now. Each peak was lower than the last, giving us the classic momentum divergence we look to see at important peaks. Given the double zigzag equality relationship, along with the diverging momentum profile, we think the Nasdaq stocks could well start to underperform their NYSE-listed brethren imminently (perhaps starting today).

This is an interesting conclusion to come to in its own right but when combined with the Elliott wave, Fibonacci, and Demark indicator conclusions we have come to today for the NDX, it becomes an even more enticing bit of technical analysis. In sum then, we can conclude the following:

(1) the chart of the Nasdaq stocks vs the NYSE listed stocks is showing a clearly bearish pattern from the Q1:04 peaks that may not complete until mid 2005. Until that time could see the Nasdaq to underperform the NYSE listed names and keep pressure on the overall market given the tendency of the Nasdaq to "lead" the rest of the market;

(2) such underperformance will not be constant, as a number of up-downs are expected between now and mid 2005;

(3) we believe the Nasdaq stocks are on the cusp of returning to underperforming the NYSE stocks for the next few months (until January 2005 +/- 1 month), possibly even starting that bearish trend today.

Based on these conclusions and the bearish technical conclusion we have reached on the NDX (see today's note), we think a good risk/reward setup is presenting itself favoring greater weakness in the Nasdaq-listed stock over NYSE listed names. Not advice, just sharing my eyes with hopes that it lends to the educational process.

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No positions in stocks mentioned.

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