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NASDAQ Retraces 50% From COVID Low; Potential For Tradable Rally Increases

By Guy S. Ortmann, CMTStock MarketsMay 13, 2022 09:45AM ET
www.investing.com/analysis/nasdaq-retraces-50-from-covid-low-potential-for-tradable-rally-increases-200624170
NASDAQ Retraces 50% From COVID Low; Potential For Tradable Rally Increases
By Guy S. Ortmann, CMT   |  May 13, 2022 09:45AM ET
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The major equity indexes closed mixed Thursday with positive internals on the NYSE and NASDAQ as trading volumes rose from the prior session. All closed above their intraday lows and at mid to high intraday levels. However, the action was insufficient regarding the ability of any of the charts to violate their resistance levels or near-term downtrends lines as all remain negative.

We would note, however, the NDX made an exact 50% Fibonacci retracement of all its gains from its COVID lows of 2020. We view that as a slight positive. Meanwhile, the data remains bullish for the most part, particularly concerning the high degree of investor fear. As well, the SPX is now trading at a discount to its ballpark fair value. As such, while we continue to require validation from the charts regarding a positive reversal, yesterday’s action combined with the data suggests we may be setting up for a rally that could test the index resistance levels, in our view.

On the charts, the major equity indexes closed mixed yesterday with positive internals and higher volumes on the NYSE and NASDAQ.

  • After recovering from their intraday lows, the COMPQX, DJT, MID, RTY, and VALUA posted gains with the rest having minor losses.
  • In particular, the NDX made a 50% retracement of its gains from its 2020 COVID lows that may prove to be a bounce point via standard technical analysis theory.
  • Yet, all remain in near-term down trends that have yet to see signs of a positive change.
  • Cumulative market breadth remains negative and below the 50 DMAs for the All Exchange, NYSE and NASDAQ.
  • Stochastic levels remain oversold but still lacking bullish crossover signals.

However, the data continues to send very bullish signals with investor sentiment (contrarian indicators) remaining at historically high levels of bearish expectations.

  • The McClellan 1-Day OB/OS oscillators remain oversold (All Exchange: -78.17 NYSE: -80.84 NASDAQ: -75.22).
  • The % of SPX issues trading above their 50 DMAs (contrarian indicator) is 16% and on a bullish signal and near its lowest level in two years.
  • The Open Insider Buy/Sell Ratio lifted to 92.7, remaining neutral.
  • The most encouraging data factor for the near-term, in our view, remains the sentiment data. The detrended Rydex Ratio (contrarian indicator page 8) remains very bullish at -2.38. Its chart shows only five times in the past decade have the ETF traders been so heavily leveraged short, all of which were followed by rallies. As well, this week’s AAII Bear/Bull Ratio (contrarian indicator) is at a very bullish 2.75 (page 8) and at a 20-year peak matched only by the 2008-2009 financial crisis as investment banks collapsed.
  • Also, the Investors Intelligence Bear/Bull Ratio is on a very bullish signal and at a decade peak of fear at 39.3/30.9. Crowd fear is at very extreme levels.
  • The forward 12-month consensus earnings estimate from Bloomberg for the SPX lifted to $235.68. Thus, the SPX forward multiple is 16.7 and now at a discount to the “rule of 20” finding ballpark fair value at 17.2.
  • The SPX forward earnings yield is 6.0%.
  • The 10-year Treasury yield closed lower at 2.82%. We view support as 2.5% and resistance at 3.2%.
NASDAQ Retraces 50% From COVID Low; Potential For Tradable Rally Increases
 

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NASDAQ Retraces 50% From COVID Low; Potential For Tradable Rally Increases

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