McHugh On The Markets

NASDAQ 100 Buy and Sell Signals
July 9^th, 2005
Robert McHugh, Ph.D.

We have two highly correlative buy and sell signal indicators for the NASDAQ 100. Below is the 14 Day Stochastic Indicator which produces "buy" and "sell" signals based upon price momentum. This indicator tends to be early, but often right. It analyzes the number of NASDAQ stocks that are above their 14 day moving average and compares this to a slower five day moving average of same. Decisive crossovers of the Fast over the Slow produce "buy" signals. Decisive breaks of the Fast below the Slow measure produce "sell" signals. The prior signal given was a "sell" on June 3rd, 2005. Since then the NASDAQ 100 fell 60 points, or 3.9 percent. On Friday, July 8th, this indicator generated a "buy" signal.

A second buy/sell signal indicator is shown with the above chart which we make available on a regular basis to our paid subscribers at www.technicalindicatorindex.com . This is the Purchasing Power Indicator TM for the NASDAQ 100 stock index. This also produces "buy" and "sell" signals, but based upon the power of price movements. Its data source is broader than just price. The value of this indicator is it incorporates the quality of price moves. It identifies when trend reversals occur based upon the power of the turn. This makes for a nice confirming "buy" or "sell" indicator to the 14 day stochastic signals.

Friday's reading for the PPI comes in at 55.04, and has generated a "buy" signal. We have placed arrows where previous buy and sell signals were generated. One of the benefits of this signal is that if there are false breakouts, it is smart enough to recognize them quickly and reverse the signal. Another benefit is that it does a good job of identifying trends that have multi-week potential. The previous signal given was a "sell" on June 6th. Since then, the NDX fell 61 points, or 4.0 percent. This indicator may not give signals as early as the 14 day stochastic, although sometimes it does - like on Friday, but when it does generate one, there is a very high probability that a tradable trend is underway, and that there is enough price movement left in the move to profit.

If for some mysterious market reason, prices are simply whipsawing in the aftermath of the London terrorist attacks, a "sell" signal would be generated with a drop in this indicator to below 49.00. At the top of the next page, courtesy of www.stockcharts.com, we present the Elliott Wave count we believe to be most accurate in the NASDAQ 100 at this time.

We see a five-wave impulse decline from December 15th's 1,625.70 top to April 29th's low. Minor wave 1 down. The rally from April 29th, 2005 to June 2nd's 1,568.96 top is a three-wave Minuette wave a up, of an a-up, b-down, c-up Minor degree 2, which will be a 3-3-5 Flat pattern when complete. Wave b down finished its three-wave decline at Thursday's 1,484.18 low. Thursday's afternoon rally and Friday's rally are the start of Micro degree wave 1 of what will be a five-wave impulse Minuette c up to complete the Minor wave 2 correction of the December to April decline. Sorry about all the letters and numbers nomenclature, but for EW buffs, this stuff is important. For those not so interested in EW analysis, just know that we have a final rally leg underway before a huge wave 3 decline.

I can now say "huge" because the rally of the past two days tells us we are dealing with higher degree waves (longer-term and larger) than many originally thought. Thus the next wave down will be bigger than if we were in a smaller wave degree count. There is one Bullish possibility here. There is a potential Inverse Bullish Head & Shoulders pattern forming. Should the NDX cross decisively above 1,570ish, this pattern would suggest a huge rally toward 1,730ish. That would mean primary degree wave (2) up did not complete back on December 15th, 2004. Prices would have to top 1,625.70 for that to occur. Targets for Minor wave 2 to top at are 1,537.33 for a .618 retrace, and 1,576.19 for a .786 retrace of 1 down.

"The Lord is my light and my salvation;
Whom shall I fear?
The Lord is the defense of my life;
Whom shall I dread?
When evildoers came upon me to devour my flesh,
My adversaries and my enemies, they stumbled and fell.
Though a host encamp against me,
My heart will not fear;
Though war arise against me,
In spite of this I shall be confident."

Psalms 27:1-3

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.