NASDAQ Toppy? Chartist/Technician Notes Secular Bear (QQQQ, SMH, XLK)

What happens when you get a pullback after the markets have rallied some 50% from the lows of the year?  Technicians key in with the charts, and much of the market bullishness suddenly disappears.  Throw in a the slowest or second slowest market week (Labor Day and the week between Christmas and New Years).  We have started seeing some troubling data on the charts and in the performance of stocks on good news, which is presumably because the prices have become so elevated.  One of our affiliates has recently come out with a key NASDAQ watch alert here, and the key ETF play we would watch on this are the PowerShares QQQ (NASDAQ: QQQQ), the Semiconductor HOLDRS (NYSE: SMH), and Technology Select Sector SPDR (NYSE: XLK) because these are effectively the most liquid and active of technology ETF products that would generally react to NASDAQ-specific moves.

More importantly than anything is that the notion here from this technician is that we are in a SECULAR BEAR MARKET… meaning all rallies are effectively just bigger opportunities to sell for traders.  These tends to be long periods where stocks and the economy overall make little or no real progress, and market rallies or bull markets within this period are short-term in duration and where they do not make significant new highs.

• PowerShares QQQ (NASDAQ: QQQQ) is the first go-to ETF as it is perhaps the oldest but more importantly the most liquid of NASDAQ-related ETFs.  Technically it keys off of the NASDAQ-100 rather than the total NASDAQ… but if you can find a longer-term period where the two were not generally correlated then it is news to us.
• Semiconductor HOLDRS (NYSE: SMH) is one of the top tech-ETF trades dominated largely by NASDAQ stocks in the chip and related sectors, although Texas Instruments has close to the same weighting at Intel in this one… both at over 20% each.
• Technology Select Sector SPDR (NYSE: XLK) has some telecom exposure and some NYSE-listed exposure, but six of the top 10 holdings are NASDAQ-listed key tech stock of Apple, Microsoft, Google, Cisco, Oracle, and QUALCOMM. This one trades over 8 million shares on average per day.

The audio/video and chart analysis here has been put together by our affiliate INO.com.  While we at 24/7 Wall Street are never purely chart-focused and while we tend to believe that pure technicians often miss out on key developments, we also know how silly it is to fly without looking at charts in the investment and trading decision process. We’d highly recommend the six minutes the audio/visual presentation takes for those who have been wondering of they should start putting in trading stops or for those who think stocks have just rallied to far from lows considering the growth that lies ahead.

As Adam Hewison at INO has noted, “After making a low in March of 2001, this market has had multi-year recovery which has rallied it very close to a 50% Fibonacci retracement level. After a nearly 50% recovery, this market now appears to be faltering.” Throw in September and October, historically very tough months for stocks, and suddenly the interest may be higher than if this was two weeks ago in the midst of the last rally.

Again, that full audio/visual chart on the NASDAQ is here.

JON C. OGG
SEPT. 2, 2009