|Figure 1: Chart of the Nasdaq.|
|Graphic provided by: MetaStock.|
|The Nasdaq broke falling price channel resistance with a strong move in late March and early April (black arrow). After a pullback to broken resistance, the index found support around 1980 and advanced above 2040 on strong volume (green arrows). Upside volume on the 22-Apr advance was the highest since 2-Apr and the second highest since 23-Jan. The breakout argues for a continuation of the prior advance (1896 to 2080) and challenge to the January high.|
|But wait, something ain't quite right. Despite the breakout above 2040 in the Nasdaq, the Semiconductor HLDRS (SMH) is trading closer to its March low than its March high. The stock participated in the initial advance from late March to early April, but quickly fell back and failed to partake in the advance from April 21 to 23. This lack of participation from such a key group is weighing on the Nasdaq and prevented a move above 2080.|
Figure 2: Chart of the Semiconductor HLDRS (SMH).
The price relative, which is a simple plot of the SMH/Nasdaq ratio, shows that the problem remains. SMH outperforms when the price relative (ratio) moves higher and underperforms when the price relative (ratio) moves lower. A large bearish divergence formed from November to January (red line) and this foreshadowed the January peak in the Nasdaq. The price relative remains in a downtrend and broke below its 200-day simple moving average in early April. Until the price relative forms a bullish divergence or turns higher, SMH is likely to keep pressure on the Nasdaq.
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