Rallying Over the Fed Hurdle - Quick Technical Review

By Dr. Duru written for One-Twenty

August 16, 2006

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The market made some great technical accomplishments on Tuesday, including the much watched 1280 level - the July highs - for the S&P 500 and the everlasting post-9/11 rally high of 2100 on the NASDAQ. Given that we have heard these stories over and over again for some time, I thought I would paint things in the perspective of the market's obsession with all things Federal Reserve.

In early July, the market got that sinking feeling as the big rally from the Fed's June meeting quickly faded within days. The Fed's June announcement came on the second-to-last trading day of the quarter and was the perfect set-up for a monster rally, almost no matter what the Fed actually said and did. The post-June Fed highs mark the July highs that everyone has been watching like a hawk. While the S&P eventually turned around and recaptured its composure, the NASDAQ has yet to recover. I have stated that the options backdating has been the major overhang (also click here for an interesting interview with Network Appliance's CEO on the topic!), but it seems that fear of slowing economic growth has plagued this index given its heavy weighting in cyclical technology stocks (remember back in the bubble days when pundits proclaimed that tech had conquered the economic cycle?). Whatever the reason, tech is just plain ugly and unexciting right now, Cisco's large leap notwithstanding. Mind you, when things are ugliest is probably when you want to give serious buying consideration. But we will save that for another day.

Let's first look at the S&P with respect to the last two Fed meetings with the following stripped down chart

S&P 500

As you can see, even when you include the quickly faded rally from the Fed meeting last week, the S&P has fully recovered the highs from June's Fed meeting and has essentially loitered around those levels. If this index can continue to make progress, it will signal the market's overall willingness to place a more confident bet that the Fed is done and soft-landing is on its way for the economy.

The NASDAQ is a different story. The stripped-down chart below shows this index still has a bit of work ahead of it.

S&P 500

The NASDAQ has punctured the 2100 level (again) and cleared the highs from last week's Fed meeting. But the highs from the June meeting remain 75 points away. Of course, two more days like Tuesday, and we are easily there. I contend that the rally in the S&P 500 cannot be convincing until the NASDAQ pulls off this recovery. A continued push up would also indicate that the NASDAQ has likely established a new trading channel with the lower limits have been reduced. Longer-term, we can get excited by the upside possibilities, but do not forget these lower levels that will constantly be beckoning...waiting for the next recession scare(s).

Be careful out there!

DrDuru, 2006