NASDAQ Commentary

The NASDAQ's flat close on Friday still left it at 2339.79 for the week, which was a 26.97 point improvement from the previous Friday. And although a 1.17% rally for the week isn't red-hot, it's still a gain. Plus, a key resistance level was broken that should make it easier for the bulls to start getting traction now. So, we'll at least concede that the uptrend has a renewed fighting chance. 

The key item on the chart this week is the move above the resistance line at 2333. We had seen this mark send the composite lower a couple of times, but the third time really was the charm. As a result, we now have a bullish divergence on the MACD chart, and a bullish volume trend as well. We're going to take those at face value for the time being, but also with a grain of salt.

Simultaneously, we're still skeptical too. The NASDAQ has hit 'new highs' before.....twice in the last few months. The first time was in November, which actually led to some decent short-term gains, but the index also stalled, then dipped slightly. The second instance was the move to 2333 in January, but again, the rally faded quickly, and the index got stuck in the mud for a few weeks. So while we'd normally encourage buying on a breakout such as this, we're concerned that this is just bait. It just happens to be pretty smart bait......the recent trading levels were just slightly above recent highs - just enough to provide a sense of a true breakout. The problem is the VXN is starting to drift higher again, although very quietly. Those two ideas are at odds with each other.

What we'd really like (ok, need) to see is a true breakout bar. The big outside reversal bar from January 3rd is an ideal example (lower low, higher high, higher close, rising volume) of what really needs to happen to spark a rally. We'd also settle from what we saw on November 2nd (open at low, close at high, rising volume. big gain) as evidence. We just haven't seen one of those big decisive days that usually jump starts big moves. (Those two example days are marked on the chart.)

NASDAQ Chart

S&P 500 Commentary

Despite the NASDAQ's gain last week, the S&P 500 lost 8.10 points. The 0.62% dip wasn't major, but it's still a stark contrast with the tech-heavy NASDAQ's performance. The SPX closed at 1294.85, which was just a fraction back under the 10 and 20 day moving average lines. Technically, that's the first part of a sell signal, which is yet another reason why we're skeptical of the NASDAQ's strength - it's a solo participant in the rally.

In fact, we're even deeper into a MACD as well as a stochastic sell signal for the S&P 500. We mentioned that we were seeing the beginning of both signals in the MidWeek Update, but there was nothing done between now and then that even came close to reversing them. So, as with the NASDAQ's buy signals, we have to accept the SPX's sell signals at face value.

As for how far the sell signals might carry the S&P 500 lower, the answer is, not far (if at all - there are no guarantees in this choppy market). There are a couple of potential support lines. One is at 1290. and the other is around 1280. A dip that low would also mirror recent dips under the 10/20 day averages, meaning that the current up-and-down action isn't a but unusual. We'd only get really bearish if both of those support line were breached.

That said, the VIX remains a major thorn in the side for the bulls. It's still hovering at incredible lows, but we saw hints of upside pressure the last two days of this past week. There hasn't been any problem getting those upward VIX moves quickly undone over the course of the last three months, which has blocked any major corrections from ever taking shape. But, it's still this chart's biggest vulnerability. What we'd be worried about here (if you're a bull) is a smooth move higher, with a cross of the 10 day line (red) above the 50 day average (purple). Why both criteria? Well, a cross of the 10 day line back above the 50 day line would signal a shift in direction for the VIX, while a smooth move would prevent any sharp reversals from occurring - like the one we saw on January 20th (marked with arrow). For an example of why 'smooth' makes the difference, see the August-October corrections.....the VIX trended higher in a rather quiet, controlled fashion. If you see that happen now, along with a break of those support lines, then look out below.

In the meantime, resistance is at 1310, where we topped out a couple of times over the last two weeks.

Dow Jones Industrial Average Commentary

The Dow's 171 point selloff last week left it at 11,109, and it's 1.52% drop was the most bearish of the three major indices. Seeing that disparity, though, has become common. The thing is, we still wouldn't say the Dow's exactly in trouble - this kind of loss following a big gain is par for the course for these blue chips. From a bigger picture perspective, the fact that the Dow is still above long-term support and still above the 50 day line means even the Dow's uptrend is still pretty well alive.

In the short run, the lower and lower closes under the 10 and 20 day moving averages along with a MACD and stochastic sell signal has pretty much yielded the results you'd expect....bearish ones. However, with the 50 day line and that support line both at 11,000 now, we have to think that the Dow is actually poised to find support soon. A tumble under the 50 day line shouldn't be a big worry for the bulls, but if that support line (dashed) breaks, that will change the complexion of things quite a bit.

In any case, this truly is a tale of two markets. Some of the best opportunities that traders may be able to take advantage of as long as things stay choppy is the fact that the indices seem to rise and fall at the expense of one another. As for position and swing traders, just take that as a warning that not all stocks and indices are moving in tandem.   

Dow Jones Industrial Average Chart

Price Headley is the founder and chief analyst of BigTrends.com.