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Updated 8/15/2008

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 show you 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.

Since this chart shows the rate of return rather than the current price it is much easier to see performance, we don't have to guess if we are up or down from last year. If we are below the zero line... we are down, if we are above the zero line... we are up. The key is to exit positions while we are in positive territory (with a gain) rather than waiting until we have a loss 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. Which can be achieved through the use of an index fund.

Current Analysis:

The NASDAQ  annual rate of return is up to -3.48% from -14.27% due to the 6.11% monthly gain.  I suppose a 3 1/2% loss is better than a 14% loss. Although if you are following the ROC you are out of the market right now (and happy to be).

Currently the NASDAQ stands at 2453 up from 2312 last month. But the NASDAQ ROC may be getting nearer to a buy signal.

From the peak of October 2007 the NASDAQ  is still down -11.22% .

We are rising near the 12 month moving average as we near the 12 month break even point. If we cross the moving average we would have a buy signal.

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.