Was the Nasdaq’s Reversal Genuine?

Friday, November 2, 2012

Was the Nasdaq’s Reversal Genuine?

Rally propelled by tech stocks, but financials did not participate

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Nov.2, stock advice .- Stocks started November with a sharp rally that carried through until noon when profit-taking began. But the rally was fueled by better-than-expected economic numbers, and so the early gains held and the Dow closed with a triple-digit advance.

At Thursday’s close, the Dow Jones Industrial Average was up 136 points at 13,233, the S&P 500 rose 15 points to 1,428, and the Nasdaq jumped 43 points to 3,020. The NYSE traded 795 million shares and the Nasdaq crossed 467 million. Advancers exceeded decliners on the Big Board by over 3-to-1 and by 1.9-to-1 on the Nasdaq.

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Thursday’s rally was propelled by the technology sector. The Nasdaq popped above its 200-day moving average and successfully tested that support line. But in order for this volatile index to complete a near-term trend change and shift its momentum up, it will have to breach the resistance line at 3,039, which marked the neckline of a small head-and-shoulders top.

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The PowerShares QQQ Trust (NYSE:QQQ), which tracks the 100 largest domestic and international non-financial stocks of the Nasdaq, illustrates the power behind the jump of the broader-based index.

QQQ stocks have generally been the reason behind the Nasdaq’s advance for much of this year, and include names like Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Comcast(NASDAQ: CMCSA), Cisco (NASDAQ:CSCO) and Google (NASDAQ:GOOG).

This index had a much steeper decline than the Nasdaq, and therefore, may have a difficult time completing its reversal.

Conclusion: Like the broader index, the QQQ was very oversold and due for a bounce. Whether a genuine “reversal” is completed depends mainly upon the technology sector since the next largest sector of the Nasdaq, the financial stocks, have not yet demonstrated their ability to complete a turn higher.

If the big tech stocks are unable to follow through, then Thursday’s rally may be only the result of the normal monthly infusion of retirement money from institutions..

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