NDX Lags, While Overall Stock Market Strong

By: Jack_Steiman

2808 Nasdaq is a huge gap down created a week or so ago off the top. We got within 10 points today (2798) before a strong reversal lower took place. Small caps did the majority of the selling. The Nasdaq stocks as well as the Dow and S&P 500 were out performing throughout the entire trading day. The highest beta, most frothy stocks, took it on the chin showing classic bull market action. Nothing too heavy across the board, although we could definitely use more selling across the board to unwind things on those oscillators to oversold. No guarantee we get it, but the line in the sand is clearly drawn here. The Nasdaq is being protected by the 20-day exponential moving average down to the 50-day exponential moving average with gaps as well to help out while that huge open gap down at 2808 is capping things on the way up.

In other words 2715 to 2770 is protecting down side from getting out of hand while 2808 is putting the breaks on things. So how does one play such as market. Well it's pretty simple really. The closer you get to support, and as long as the oscillators align properly, the easier it is to go long. You don't really want to short very much, if at all, because the primary trend is higher. Longer-term bull market. So for me and my suggestion to you is, the closer we get to 2808 the more you lighten up on old plays and refrain from taking on new ones. Only a strong, clear above 2808 changes that picture. Buy weakness. Lighten up at resistance.

The internals spoke today about the bifurcation that took place. Risk assets were not what folks wanted. Flat advance-decline line on the NDX, but over two-to-one on the upside on the New York Stock Exchange. The important story here remains the same as it has been for a long time now. Money continues to rotate around. When a sector gets sold, or under performs, another area of the market gets those dollars. Money doesn't just run in to money market funds, which is what you see in bear markets. We are nowhere near anything that resembles a bear market. So today we saw different sectors well out perform away from the Nasdaq, but that doesn't mean tomorrow the Nasdaq won't out perform the rest of the market. Wash, rinse, and repeat is the way of this bull market and there's nothing out there suggesting this is going to be changing any time soon, which is bad news for the bears.

Will this market ever have a stronger pullback? Very possible, and still in play for sure, but when studying the charts, you can see why that's been a hard thing for the bears to accomplish. There are so many open gaps on the way up along with those strong moving averages, it's going to take some outside event unforeseen to get this market to take out some of those support areas. It can be the Jobs Report this Friday. It can be some civil unrest from overseas. No way to know for sure, but this market won't just quit for the sake of being overbought it appears. It's going to need a strong outside catalyst. They seem to come out of nowhere when the market needs it badly enough, but for now, overbought is not enough to get this marching lower to put some fear in to people.

If the market would allow at least the Nasdaq to break decently below its 50-day exponential moving average now at 2720, the bears would be able to rush in and take things down faster and harder. This would set up a much better, more aggressive buying opportunity. This market could use a healthy dose of fear, but who knows when we'll get it. We'll get it, but does it come from here or Nasdaq 3000? No one knows for sure, but we have to be on alert since it could come at any moment. There's enough complacency out there to get it started, but for now, it's not kicking in. Play the trend in place, but never let your guard down.

When looking at the next big move to come you have to recognize where the critical junctures are. There's no question it's the 50-day exponential moving average on the Nasdaq. Sure, the 20-day exponential moving average is first in line at 2771. Then the gap at 2751. But in truth the bears will have done nothing if they can't take out the 50-day exponential moving average. That's always the line in the sand. So if you're bearish, there's no reason to celebrate if you can remove 2771 on a closing basis. Only 2720 will do that trick.

For the bulls, only when we can blow through 2808 can you start to feel you have something to get excited about. But that's just step one. That's the bottom of the gap and not the top of the gap. Ultimately, the top of the gap will have to be taken out. The bottom is important because it was on such a huge gap down, and we did fail ten points below that level today. However, the top of the gap is at 2833. Like I said, a huge gap. Everything in between is noise. Again, buy on weakness. I wouldn't short much right here near the top because we're in that primary bull market, thus, adapt to where we are and play appropriately and you'll do just fine. Sometimes cash is good until it sets up a bit better. We'll play it as it shows its hand.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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