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NASDAQ Watch: Pounce on the Bounce?


It isn't time to celebrate the new bull market just yet.

Editor's Note: The following was posted in real time on our premium Buzz & Banter(click for a free trial). It's being shared here for the benefit of the Minyanville community.

Dear Professor Sadana,

I noticed that the NASDAQ has taken out its 200-day moving average. Would one consider such a move as 1) a leading precursor to the other indexes (S&P and DJIA) to move higher or as 2) a divergence from the broad market which is still suspect?

Minyan J.

Dear Minyan J.,

On the Buzz and Banter , we have been keeping an eye on some market indexes such as the Nasdaq Composite (COMPQX), Semis (SMH), Homebuilders (XHB) and Retailers (RTH) as they tag their own very important 200-day moving averages. Much has been made in the media about these. Of course, this is a cause for some celebration since this denotes that the bottoming formation is in place.

As I have delineated in Bull Market Timer Video Series, such attempts provide necessary conditions for the beginning of the end of the bear market but independently used, they may not be a sufficient condition for the start of Bull Markets as the previous 100-years of intensive study in Bear Markets has shown.

So, before we uncork the champagne bottles, celebrating the start of the new bull market, it is instructive to see how the Semis and Nasdaq tagged their 200-day moving averages in the last bear market and how many times such attempts has been made in the current bear market.

NCOMP Previous Bear

Click here to enlarge.

Semis Previous Bear

Click here to enlarge.

As you can see in the above charts, there were multiple attempts to penetrate the 200-day moving average to the upside in 2001 and 2002, and the real bull market was only launched in March of 2003, when the many other conditions for a bottom were also satisfied.

Here's how we stack up in the current bear market.

NCOMP Current

Click here to enlarge.

Semis Current

Click here to enlarge.

So, as I have discussed in the Bull Market Timer, there needs to be confirmation from many other indicators in order to confirm a broad based bullish trend, and we track all the indicators in our Weekly Updates.

With best regards,
-Smita Sadana
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