Thursday, September 11, 2008

What We See Technically

Since I've railed against being blindsided by fundamentals let's have a look at the visual aids of the markets.

Recently I have bought exchange traded funds (ETF) tracking broad equity indexes particularly the Nasdaq. In the spirit of the political season, I have to say, I was up before I was down. Below is the chart of the Nasdaq Composite index.

As you can see, we are clinging to the long term uptrend, but clearly in an intermediate downtrend. When indicators of market sentiment became historically extreme in July we bought entry positions in the index. Additionally the mysterious Fibonacci 38.2% retracement support is near at hand. Three times the Nasdaq has touched this level and held. Because technology stocks are at relatively attractive valuations we have chosen to put a toe in the water here.

Looking at the upper limits of the recent market cycles, one can see the high points have been lower with each cycle. Technically speaking this is not a good pattern and although we bought on the support we will not be adding to positions without more positive market action.

The yellow line represents the bull market which ran from 2002 until 2007 and took the Nasdaq higher by 158%. The green horizontal line is the 38% Fibbonacci retracement level at which I believe there is a reasonable strategic purchase. The average bear market runs about 10 months and with an average 25% loss. We are now at 10 months and 25% on the Nasdaq. Until earnings start to show improvement this could be a longer bear market but during 2009 I expect the market to begin looking across the abyss.

John Barnyak