SAN DIEGO (ETFguide.com) - The potential for technical
advancement always seems limitless, which is why the tech sector
(NYSEArca: XLK) often leads the market to new (recovery) highs.
Investing when much of the potential has yet to be realized is
tempting because it puts early birds in the first row of the gravy
train to 'limitless' profits.
We live in exciting times, a time where companies create vast
seemingly self-sustaining and self-perpetuating economic
ecosystems. Like a coral reef that supports sponges, crustaceans,
mollusks, fish, sea turtles, dolphins, sharks and much more,
and Facebook spawned into an economic life-giving environment (it
could aptly be called iEconomy).
Sky is the Limit
Take "Angry Birds" as an example. Angry Birds is the most
downloaded game (downloaded more than 700 million times) of the
smart phone market. Angry Birds has all sorts of spinoffs; it sold
25 million flush toys, expects to open a theme park in Finland, has
its own section at Walmart and even a Hollywood movie in the
The up side potential for Apple and Facebook seems endless and
the sky is the limit for any of the "cleaner fish" companies
benefiting from the new iEcosystem. MarketWatch just reported on
March 27 that: "Technically speaking the Nasdaq Composite (Nasdaq:
^IXIC) has reached clear skies territory."
From Angry Bird to Vulture
However, it's a human tendency to rationalize why a certain
trend should continue. In 2011, gold (NYSEArca: GLD) and silver
(NYSEArca: SLV) were viewed to be in iron clad cure against
inflation, deflation, stagflation and every other flation on the
planet. In the end, it was gold and silver that deflated as the
'worthless' paper dollar rallied.
In the early 2000s, real estate (NYSEArca: IYR) was crowned with
the title of 'never-losing investment' and of course there was a
tech bubble that, contrary to all expectations, deflated in the
Innovation leads to imagination but imagined corporate profits
often lead to deflation. Nature's ecosystems are subject to climate
changes and extinction and past economic and investment lessons
taught us that the economy is subject to the same risk. Popular
Angry Birds could morph into vultures.
For that reason, rather than buying into the new technology
hype, I'm looking to find out when and where the hype may end or
run into a speed bump.
Longer-term technical analysis is a very effective speed bump
detector. The February 20, 2012 ETF Profit Strategy Newsletter
looked at various long-term trend line, trend channel and Fibonacci
resistance levels for the Dow Jones (DJI: ^DJI), S&P 500 (SNP:
^GSPC), Nasdaq Composite (Nasdaq: ^IXIC) and Nasdaq-100 (Nasdaq:
QQQ) to identify speed bumps likely to cause a correction or
reversal. Here's the conclusion of the Newsletter's analysis:
"The common denominator between the S&P 500, DJIA and Nasdaq
Composite is that the next big resistance (should the S&P move
above 1,369, the DJIA above 13,000 and Nasdaq Composite above
2,968) is about 5 - 6% higher than Friday's closing price (8.57%
for the Nasdaq-100).
The weight of trend line and Fibonacci evidence outlined therefore
suggests that the highest probability for stocks to stall or
reverse is either right about now or about 5 - 6% from Friday's
As noted in the January 29, TF, there is no RSI divergence visible
on the weekly chart. This means that stocks could peel back from
current resistance, find support and rally into the higher
resistance cluster (reserved for subscribers) later on this year
(preferably in April or May)."
All major indexes have done just that - they paused and went on
to rally higher.
Spurred by Apple's success, the Nasdaq-100 has been the leading
U.S. index. Let's take a look at how close the Nasdaq-100 has come
to its upside target (blue line).
The chart below is an updated close up version of the chart
featured in the February 20 ETF Profit Strategy Newsletter.
We see that the Nasdaq-100 came within striking distance of the
up side target before reversing. A few days ago the VIX (Chicago
Options: ^VIX) dropped to a 54-month low and it's no surprise that
the Nasdaq-100, along with the other indexes, staged a
Minor or Major Reversal
It's yet to be determined whether this reversal was just a pause
followed by a more deliberate test of the target, or if stocks
(NYSEArca: VTI) are ready to peel away for good.
ETF Profit Strategy Newsletter
evaluates various technical, sentiment and seasonal gauges to
provide an easy to understand short, mid and long-term forecast.
Most importantly (especially in the current environment) the
Newsletter pinpoints the support levels that - once broken - will
foreshadow much lower prices.