Figure 1: Nasdaq price relative to the NYSE composite.
This first chart shows the Nasdaq and the price relative comparing the Nasdaq against the NYSE Composite. The Nasdaq declined all of 2004 with a series of lower lows and lower highs. The July-August decline was especially brutal and the August-September recovery retraced 50-62% of that decline. The lower lows and lower highs make for a downtrend, while the retracement is quite normal for corrective rallies.
|In contrast to the Nasdaq, the NYSE Composite held up better on the July-August decline and performed better on the subsequent advance. The NYSE Composite held support near its May low around 6200, while the Nasdaq formed a lower low. In addition, the NYSE Composite advanced all the way back to its June high and even closed above 660. As noted above the Nasdaq only retraced 50-62% of its July-August decline and fell well short of its June high.|
|Figure 2: NYSE composite relative to Nasdaq.|
|Graphic provided by: MetaStock.|
|Looking at the price relatives, we can see that the Nasdaq has underperformed the NYSE Composite since Jan-04. The blue price relative shows the Nasdaq relative to the NYSE Composite. This indicator managed a higher low in early September, but remains well below the red trendline and clearly in a downtrend. The black price relative (NYSE Composite versus Nasdaq) shows that the NYSE Composite has clearly outperformed the Nasdaq. This line is a mirror image of the blue price relative.|
|The advance in the Nasdaq looks like just another corrective advance or retracement within a larger downtrend. In addition to the 50-62% retracement and relative weakness, a support zone around 1900 extends back to December 2002 (green rectangle). This broken support zone now turns into resistance. With the Nasdaq underperforming, the odds of breaking through this resistance zone are diminished.|
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