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Cup Of Jo: Google & NDX Technical Action



"What difference is there, do you think, between those in Plato's cave who can only marvel at the shadows and images of various objects, provided they are content and don't know what they miss, and the philosopher who has emerged from the cave and sees the real things?" -- Desiderius Erasmus

Key Points:

  • The technical action within the NDX following Google's (GOOG) report highlights a similar type of rising wedge formation that we've been discussing with the SPX.
  • Since the January 2004 peak, the number of stocks in the NDX above the 150-DMA has been noticeably falling while over the last two years the A/D line has also been declining (illustrating fewer stocks are pushing this index up)
  • Notice the stochastic divergence present as the market attempted to break above long-term resistance (secondary road sign)
  • Next support corresponds to a market 'gap' which may be filled at 1,590 (also the 200-DMA)

On the heels of last night's Google (GOOG) earnings debauchery, I felt it apropos to pen a 'Jo' with a related theme without adding to the incessant existing coverage. Over the last few months we've been following the massive 'rising wedge' formation in the SPX (S&P 500). Today we'll switch gears and discuss the NDX (Nasdaq 100) and the impact of Google's earnings on today's potential price action.

The following two charts show the NDX over the last 5-years and 2-years respectively. As you can see, there is also an incumbent (and eerily familiar) massive rising wedge formation. Other than stating the obvious, I first wanted to point out the beginning of the year similarities between the NDX and the SPX. In the last 'Jo' I showed the breakout above and subsequent drop back below resistance on the SPX. In the case of the NDX, we essentially have the same situation; "breakout or shakeout?" However, the implications are somewhat more illuminating and a bit more concerning than that. At the top of the 5-year NDX chart there is a blue line with percentages below it. This is the % of stocks above the 150-DMA (Day Moving Average) within the Nasdaq. To some extent this illustrates the amount of stocks you can consider in an upward trend or more broadly a measure of the underlying "health" of the technical condition.

Since the January 2004 peak, within the context of the beginning of the rising wedge formation and long-term resistance level, the amount of stocks above the 150-DMA has been noticeably falling. The importance here is to take notice that every time the NDX has hit resistance, this percentage has also been declining (89%, 78%, and currently 62%). The "tell" to consider is the simple fact that over the last two years fewer stocks are pushing this index up every time the NDX comes to a slightly higher high.

Adding two and two together, this can become a house of cards and is precisely why there will be such a large fluctuation in the NDX today because of a single stock – Google. Actually, the amount of market share lost in post-market trading of Google last night was greater than the total market capitalization of General Motors (GM).

Following similar logic there are a few other important "road signs" which need to be watched as well. Looking at the shorter-term graph of the NDX (2-year – below) you will see another blue line at the bottom. This is the A/D (advance/decline) line. This shows how many stocks are advancing versus declining within the particular index. Over the last two years this A/D line, not unlike the % line discussed above, has also been declining. This tells us that a fewer number of stocks have been advancing every time the market has pushed to its upward resistance.

Another important road sign, a secondary indicator, is the stochastic divergence present as the market attempted to break above long-term resistance. Yet again, never throw stones while living in a glass house. I've outlined where I believe to be the next important support areas for the NDX. If the 50-DMA is broken, which may happen today, the next support appears to be at the 200-DMA and corresponds to a market 'gap' which may be filled at 1,590. Nonetheless, if this does occur it is not suggesting the market will collapse. It will still be in a confirmed uptrend based on the previous rising wedge formation depicted on the previous chart.

Accordingly, it is important to comprehend what the road signs are telling us about the underlying condition of the market. Happy trading and good luck to all the "Googlonians" out there.

Until next time…


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