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Nov. 10, 2011, 1:02 p.m. EST
J.C. Parets is an experienced market technician and registered investment adviser working in New York. J.C., who blogs on charting and produces the analytics web site allstarcharts.com, employs a top-down approach using inter-market analysis with particular emphases on trend recognition and Fibonacci projections. He has constructed a variety of proprietary oscillators that he adjusts over time. J.C. earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association.
By J.C. Parets
The more times that a level is tested, the higher the likelihood that it ultimately breaks. This is usually the case regardless of whether a particular security keeps bouncing off support or continuously bumps its head against resistance.
For the Nasdaq 100 /quotes/zigman/123472 NDX -0.09% , we are witnessing the latter. $59-60 has been tested numerous times throughout this past year. First in February, then again in May, one more time in July, and now it appears as though we're headed for a November test of resistance.
For a little background on this particular issue: patience has certainly been a virtue. After a false breakout in July, PowerShares QQQ Trust /quotes/zigman/105934/quotes/nls/qqq QQQ -0.05% broke down hard and didn't find support until it reached the highs of last April. This was probably the shakeout necessary to set up a big move higher. Spring 2010 resistance turned out to be major support at the August and October lows down near $50.
Now remember, this is not a fundamental story at all. I don't really care about Europe or double-dip recessions or who our president is or isn't. All we're talking about here is that resistance above us keeps getting hit. Price action is pure. We know that there are sellers just under $60 "” this has been proven all year. So let's use some logic for a minute: If there were sellers here in February and there were sellers again here in May, and again in July, simple math tells us that less and less market participants are willing to sell here. Why? Because they've already sold. The point is that as more and more sellers willing to sell have already sold, eventually everyone willing to sell has already sold. What happens then? Nothing but buyers are left. The result is what we call, "a breakout".
If we're correct in this assessment, in the future, this breakout level around $60 should become support, or a floor, on any attempts to break below again. Why is this the case? Because as we mentioned above, when all of the sellers eventually run out, the only ones left at this price are buyers. On any retest, if all we have are buyers, we would expect another rally.
So what is the catalyst that is going to take us higher in first place? Let's breakdown some of the major components of the Nasdaq 100. The biggest of all of them is obviously Apple /quotes/zigman/68270/quotes/nls/aapl AAPL -2.55% . How high can it go? A lot higher probably. The trend is our friend here and that trend is clearly up. But let's try to forget about America's favorite stock for just a minute. Look at what is happening in some of these other overlooked names:
Cisco Systems /quotes/zigman/20039/quotes/nls/csco CSCO +5.68% "” the stock that everyone loves to hate appears to be double bottoming. A breakout above this down trendline could potentially take this major component up 50% from current levels up to its 2010 highs:
Microsoft /quotes/zigman/20493/quotes/nls/msft MSFT +0.31% "” talk about boring. Who still trades this stock? I think that a lot of people will if it can manage to breakout above this symmetrical triangle. The measured move from here is around $35: The Base of the triangle is about 8 points ($31-$23) and we add that to the potential breakout level around $27 = $35:
Oracle /quotes/zigman/76584/quotes/nls/orcl ORCL +0.44% "” from a long term perspective, Oracle appears to be destined to get back to its 2000 highs. After correcting this year, it has come back with a vengeance:
Intel Corp. /quotes/zigman/20392/quotes/nls/intc INTC +0.92% "” Just broke out of a 10 year down trendline after a double bottom. The potential in this name after such a massive base is huge. $30 could just be the beginning. The old saying goes, "the bigger the base, the higher in space ":
I can go on and on with more charts but I think we're getting the point. The Index itself is set up for a big move and the major components are confirming that. Sometimes it is more important to remember that this is a market of stocks and not just a stock market. The companies within the major averages have to lead it higher (or lower). And maybe this isn't the last attempt that it will take for QQQ to break out. Perhaps some further consolidation is necessary. But from my experience, the more times that key levels are tested, the higher the likelihood that they ultimately break. The initial target here is going to be up near $66. I'm taking the March and June lows just under $54 and adding the difference to the presumed breakout above 60.
And finally, from a relative perspective, the Nasdaq 100 has been outperforming its Dow Jones /quotes/zigman/627449/delayed DJIA +0.96% and S&P /quotes/zigman/3870025 SPX +0.86% large-cap counterparts on both a long-term and short-term basis. So if you're looking for alpha, look no further.
AUTHOR DISCLOSURE: Our clients may own compnents of the Nasdaq 100.
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