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Updated 6/17/2009
The NASDAQ Rate of Change (ROC) chart is very helpful in
getting the "big picture" view quickly. The old saying "a
picture is worth a thousand words" is very applicable to this
chart.
Once you understand what it is showing you this chart
will easily point out the direction of the market and make it
easy for you to decide whether you want to be in or out of the
market.
The NASDAQ Rate of Change (ROC) chart shows the annual rate
of return along the left axis and the years since 1990 along the
bottom.
Remember this chart shows the rate of return not the current
price so it is much easier to see performance. Want to know if
we are up or down from last year? Simple, if we are below the
zero line... the NASDAQ is down, if we are above the zero
line... the NASDAQ is up.
The key is to exit positions while we are in
positive territory (with a gain above the line) rather than waiting until we
have a loss. We simply exit, sit on the sidelines safely with our
money intact and reenter when we get a buy signal.
The red line is the 12 month moving average. As
with most moving averages a buy signal is generated as the index
crosses above the moving average and a sell signal is generated
as the index crosses below the moving average. (See
Current Analysis Below)
Another helpful way to use this chart is to look at the slope
of the red moving average line. If the slope is down the market
is trending down if the slope is up the market is moving up. And
obviously if the line is basically flat the market is not
trending at all.
Just because this chart is not moving higher does not mean we
should sell. In the period from June 2004 - June 2007 the
red moving average line was basically flat, although it had a
bit of wiggle, but it was still flat at around 10% rate of
return so holding during that period would have produced returns
very close to the long term average.
If you are looking for big gains, the best
buy signals come from a movement from below the 0% line. This
allows you to capture the greatest up move.
Note: While viewing this
chart we must remember that it represents the rate of return we
would have earned if we had been holding the entire NASDAQ for
the previous 12 months. This can be achieved through the use of
an index fund or ETF.
Current Analysis:
The index has crossed above it's moving average for the first
time since October 2007. This is a big event but the question
remains is it a buy signal?
The answer can be seen inside the blue circle around 2002.
There we can see a very similar situation. The market had
crashed during 2000 -2001 and finally around November 2001 the
index crossed back above its moving average with the index
around 1579 in September 2001 .
But was it a good time to buy? Well that depends. In
October and November 2001 the NASDAQ rose 7.39% and 12.04%
respectively. December rose 2.77% so people started seeing
"green shoots" although they didn't call them that back then.
So then on a monthly basis January and February 02 the NASDAQ
lost -3.08% and
-7.52% giving back pretty
most of the gains of October, November and December. March
was up 6.72% April was down -6.13%.
Then May, June, and July lost -1.61%,
-9.98% and a whopping
-18.75% respectively.
It was actually a massive "suckers rally" but short
term traders made a lot of money. February 2003 the NASDAQ
stood at 1310.
Notice that although at points the index is rising rapidly
the annual rate of return never crosses above the zero line.
This means that if you held short term you could make money but
holding long term was still a losing proposition.
We can see that the final crossing above the moving average
didn't happen until April 2003.
And it wasn't until June that the index finally moved above
the zero line. and where was the NASDAQ at that point?
At 1628 it was very close to its level back in 2001. If
you had stayed out that entire period you could have earned nice
safe interest for almost 2 years and not risked a single penny
in the stock market.
The current rally is beginning to look much like the suckers
rally of 2001. Like in late 2001 we have seen a few months
of significant gains. Then it was 7.39%, 12.044% and
2.77%. Now it is 1.34%, 13.02%, 0.70% and finally 7.93%
over the last month.
As we can see from the chart the annual rate of return is
still quite negative at
-26.82%. So we are about due for some
negative returns like back in 2002.
I have been saying, "The NASDAQ was extremely oversold offering the opportunity to
bounce back a bit but that by no means indicates that the pain
is gone for good. There is still a very good possibility
that this is just a bear market rally".
And as of this writing it looks like a drop is imminent.
Last month I thought, " it looks like we may actually be at the crest of a
Bear market rally and I wouldn't be surprised if next month the
NASDAQ is significantly lower than it is today". But it
didn't materialize... perhaps I was a month early.
At this point the ROC is technically above its moving average
but still below the zero line making it a traders market and not
safe waters for long term investors.
If you are worried about missing the rally think about this,
the last safe buy signal occurred in June of 2003 with the
NASDAQ at 1627. We are currently in nowhere near as safe a
position and 6 years later... last month the NASDAQ was at
1664. A very good reason to listen to the ROC. Long
term investors need to keep your powder dry and wait for a safe
entry point (and this isn't it.)
My feeling is we will see 1600 again (maybe several times)
and we will probably see 1300 again as well. In between we
may see both 1900 and 1400.
See the NYSE ROC for further details.
Tim McMahon, Editor
Financial Trend Forecaster
Disclaimer:
At Financial Trend Forecaster we
are not
registered investment advisors and do not provide any individualized
advice. Past performance is not necessarily indicative of future
performance and future accuracy and profitable results cannot be
guaranteed.
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