What I Like From Like On NASDAQ ~ The Risk Averse Alert

Saturday, January 24, 2009

What I Like From Like On NASDAQ

Here's a picture worth a thousand words painted on a chart of the NASDAQ Composite extending over the past two years. This view helps make the case for rapid recovery of much of the losses suffered during the latter half of 2008, supporting the possibility of a nearly 60% advance unfolding over approximately the next six months.


Where do I begin? How about the line of support that, from 2003-2008 put a floor under the NASDAQ Composite. This support resided last year in the vicinity of 2200 and was decisively broken during the September-October '08 collapse. From this point forward, then, this [former] line of support, well-established over 5+ years, now stands as resistance.

Indeed, during those 5+ years we can suppose a series of long positions was established each time this [modestly rising] line of support was tested. And it was tested on many occasions.

These positions are now under water. We can be reasonably confident, then, any recovery to the area where long positions were established will be met by selling from those longs happy for a chance to get out even.

Lo and behold, too, the vicinity of 2200 is where the NASDAQ Composite traded during the week Lehman Brothers went bust. I have for some time been projecting resistance to any future advance once indexes approach levels last seen mid-September '08, when Lehman fell into bankruptcy.

But the thing I really wanted to show you was the behavior of the NASDAQ Composite from its November 2007 top through its secondary tops ... first in May 2008, then in August 2008.

Note how NASDAQ's break in January '08 was similar to its larger break in October '08. The lower end of a declining channel forming since the November '07 top was decisively violated in January '08. Similarly, the lower end of a larger declining channel forming since the same November '07 top was decisively violated in October '08.

Now, observe NASDAQ's behavior following its January '08 bottom. We see similar behavior following its October '08 bottom. Indeed, back in October I was projecting the likelihood of a drawn out bottoming process ... much as has in fact been developing.

Finally, note how in April '08 the NASDAQ Composite jumped back into the narrow declining channel out of which it had fallen in January '08. Not only did NASDAQ return to this channel, but it subsequently rose to the upper end of it by May-June '08.

So, could we be looking at similar behavior going forward? Might the NASDAQ Composite not only return to the larger declining channel out of which it fell in October '08, but subsequently rise to the upper end of this channel?

I submit this is, indeed, a distinct possibility...

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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