FYI | Jul 20 2006
By Greg Peel
Jason Goepfert of sentimenTrader.com (as republished for DailyWealth) would like you to note that the Nasdaq Composite Index has hit a new 52-week low for the first time in three years. History shows, Jason informs us, that a substantial rally may well follow.
The story goes like this:
In the 35 years of the Nasdaq Composite Index, a new 52-week low has only been established, after three years or more, on four occasions.
(Bear in mind that a 52-week low is a moveable feast, not a January to December proposition. It means a low any time in the last 52 weeks. When you look at the accompanying graph, you’ll see that other lows have been established, but a previously lower low has always been hit within the 52 week period.)
Each time the Nasdaq has run three years without a new 52-week low, and then hit one, the index has subsequently rallied. In 1980 it rallied 58%, in 1987 (post crash) 7%, in 1994 33%, and in 1998 68%.
When the new low is established the first thing that usually happens is panic from the bears. A breach of such a support point often spells danger. However, Goepfert notes that although a panic sell-off may occur to an even lower low, in the four occasions above the turnaround has provided extraordinary profit opportunities.
Of course a lot comes down to knowing just when a low has been established, and knowing when the rally has really started, but you get the drift.
To add a bit of spice to the mix, Goepfort also points out that last Friday only 6% of the components in the Nasdaq 100 closed above their respective 10-day average, and only 10% closed above their 50-day. This might look really doomsday-ish, but in the nine times such a "washout", as Goepfort calls it, has occurred in the last decade the Nasdaq 100 was higher three months later by an average of 30%.
Is this enough of a precedent to make a call? Goepfort is not suggesting you put your house on it. But then contrarian traders do often make the best returns.
The Nasdaq Composite bounced off the low and rallied 1.83% last night. But before you call your US broker, Goepfort acknowledges that war and a wobbly tech reporting season will no doubt provide volatility in the shorter term. As to when the low will be cemented is not yet clear.
Good luck to all. We now return you to regular programming.