Will the Nasdaq and Tech Sector Lead Stocks to a New Bull Market?

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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, Apple 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 making.

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 year 2000.

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.

Quantifying Limitless

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 close.

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 reversal.

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.

The 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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

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