Why Sell The NASDAQ 100?
Follow-up No. 4 /April 22, 2005
On May 26, 2005, we recommended to sell short the NASDAQ 100 Index and to place a stop loss at 1560. Those who took profit in August, would have made a nice sum.
By December of last year, this Index again reached an excessively overbought level as indicated by the PMO depicted below:
As the Nasdaq 100 Index has fallen back to the 1400 level, we wish to examine what the future may bring.
The long-term picture
The long-term picture clearly reveals that the market is in a down-trend that started at the beginning of the year. Within this down-trend, it is reaching an oversold condition but not one that would signal the down-turn may already have ended. A test at the 1300 to 1350 level is to be expected.
The medium-term picture
The market is in a precarious condition and it would certainly be incautious to try to go against the trend at this stage. Expect that the market will find some support around the 1300 level. Nevertheless, we do not see more than a few attempts to correct the oversold condition.
The short-term picture
Short-term, it is evident that rallies in the down-trend do not have the strength to supersede previous tops or the upper down-trend line.
On the down-side there is some significant support between 1300 and 1350 which may be tested a few imes before giving way. T
Are US-markets fundamentally cheap?
The chart below tells a simple story. While markets can remain overvalued for a long time and even become more overvalued, this risk of a sharp correction also increases. At this stage, US markets ARE overvalued:
So the answer to the above question is a simple "NO".
The NASDAQ Volatility Index
This index has faithfully foreshadowed the future course of markets. While it is not easy to say which extreme will be the ultimate, sooner or later, the trend will reverse. As we see above, the trend-reversal was clearly in the cards towards the end of last year.
The following recommendations were valid at the time of writing, viz. at
and may no longer be relevant at the time of reading.
Our recommendations for NASDAQ 100 (1408.59) PLACE STOPS ABOVE 1,460
Long-term (several months) REMAIN SHORT
Medium-term (several weeks) REMAIN SHORT
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
April 22, 2005
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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