Hello, and welcome once again to the Smart Money, Dumb Money Show. And I am your host, as always, Keith Richards. I’m president and chief portfolio manager with ValueTrend Wealth Management, and I’m a technical analyst. So this show is geared towards technical analysis. And today we’re going to talk about the NASDAQ and I want to bring you back to a chart that I posted on my blog some time ago. Well over a year ago. I hope that any of you that are watching this video are regular readers of the blog. You need to subscribe to the blog if you don’t, because you would be missing a lot of great information. The blog contains my history for the record of my market calls and sector calls. And I don’t just like to say that I’ve got a good track record. I like to offer a history and you can see that history by referring to my blogs and get all kinds of great information on different sectors or the market or interest rates and bonds and all kinds of things.
There’s a search engine on the blog. Just go to the search engine and type in the subject that you want to find information on. And just like any search engine, it will search and see how many blogs might contain the keywords you are looking for. Anyhow, back to today’s topic, which is the NASDAQ. And I’m going to interchange back and forth with two charts between the NASDAQ composite index, which we’ll start with, and then the NASDAQ 100. Now, why would I switch between the two? Quite frankly, there’s no real reason. I just wanted to have an excuse for explaining the difference. The NASDAQ composite contains something like 3000 stocks and it’s got financials and other sectors. Although they still represent a relatively minor component of the NASDAQ composite, it’s still got these other sectors that the 100 index doesn’t have. So the NASDAQ 100 is made up of a hundred stocks, and it’s got the big concentration in what you would expect, which is technology, the FANGs, and of course, biotech, that kind of thing, high growth stocks.
They’re both very similar. In fact, if you overlay the two, you’ll find there’s hardly any difference. Just like if you overlay, for example, here on the Toronto Stock Exchange, overlay the TSX 60, which is only 60 stocks, over the TSX 300 composite that you will find that they have very, very high correlation. So it’s hardly worth looking at the 300 when you can look at the 60 and you might say the same for the NASDAQ 100, but I’ll present both charts because there will be minor differences because of the influence in the larger composite by the financials and stuff, small that may it be. So let’s share the screen and go right to the composite. And this chart is a chart that I had on the screen on my blog in front of you in 2021. And in fact, this notation, the fact that I noted that the market was 35% over its long-term trend line was made back around the third quarter of 2021 fourth quarter of 2021.
And what I was saying is, you know, something when markets arc off of a trend line just like my rule of the moving average so the red line, the 200 day moving average, whenever the market gets more than 10% off in the moving average, you’ll tend to find it corrects just like it has. But if you also look at the trend lines, the bigger picture, when the market arcs too much off of the trend line, it tends to decline and come back and it does this over and over again. So we are at a level where the NASDAQ during 2020 and 2021, because of all the COVID movements, you know, as people worked inside and all these kind of very high growth stocks that quite frankly were largely bid up on a hope and a prayer and less on their current earnings and less on reality. Let’s face it. Now what happened is that the NASDAQ did move something like 35% over its long-term trend line. And I noted on the blog that that doesn’t last forever. So here we are. And you’ll see that we’re pretty darn close to that trend line. And sometimes, you know, when you get a pullback, it doesn’t always, like here, it doesn’t always pull exactly back to the trend line. You saw this pullback.
My thoughts are that a lot of the flush out for the NASDAQ has been completed. Although we still do have that potential for the NASDAQ to come back to maybe closer to 10 and a half to 11,000. Remember a trend line is ever moving to the right. So you have to not look at it linearly. You have to sort of extrapolate based on the angle of dissent where this might land. And it might actually end up closer to 11,000, but that’s still a fair chunk because it’s near 12,000 right now, 12,100 and something. So that would be a good 10% possibility on the downside, but much of the flush has happened. So the question might be, is there an opportunity on the NASDAQ? So I want to just look at a couple things. The other indicator that told me that the NASDAQ was over bought, I use two big, long-term indicators to see macro trends and please take my technical analysis online course, if you have not done so already, because these two indicators are discussed quite thoroughly in that course. They really do help you see the moments of rounding over of a market when you are in one of these situations like we had when the market had gone extraordinarily over a long-term trendline.
So you can see that the MACD rounded over. It peaked and it crossed and it started moving lower and you can see that rate of change. Now I use a pretty big rate of change. This is a 52 week rate of change. I often, for the really big pictures, I’ll use 60. So the point is that I look for a point and you can see that sometimes you get one of these points and the market can fall. And sometimes when the rate change gets uber oversold, it can come off of a low point. Now, where are we right now? Well, when we look at MACD it is definitely in a very deeply oversold condition.
It looks like it’s trying to do some movement up, but it’s done that before. You can see it here. So I’m not going to say that that oversold condition is yet over and it ain’t over till the fat lady sings as Yogi Berra, it wasn’t Yogi Berra, so somebody once said. I’ve quoted that person in my blog before with the correct name. The MACD needs to cross to the upside. Now on the positive side, you do see a little bit of positive divergence possibly between these two peaks. So there’s some possibility that the NASDAQ will begin a bottoming process really soon. That’s to see though, because the rate of change, which is the bigger indicator, especially after a massive flush. We had a massive flush back in 2008, as many of you will remember, on the technology sector.
Well, this has been a pretty substantial flush as well. And yet we don’t see the rate of change going as deep as it did back in the bad old days of 2008, 2009. So that’s why I’m suggesting that even though we may be approaching the bottom for the NASDAQ, it very well could come right down to the trend line and maybe even overshoot it a bit as it did in 2018 and 2020 during the COVID crash. So that’s the first observation. The market is forming what may become an oversold position and forming a setup for an eventual move back up. Is it here yet? No, we don’t see any bullish crossovers on the MACD and we don’t see the rate of change fully flushed out yet, but it does look like it’s getting there. So that’s my first chart. The next chart is the NASDAQ 100, just like I mentioned, I thought I would throw that in just for kicks and giggles.
This is a closer look. So this is, again, a weekly chart, but we’re taking a little bit more of a zoomed approach. Now I’ve got a bunch of momentum indicators on here. This is money flow momentum, and you can see money flow was flowing aggressively out of the NASDAQ, but it is starting to pick up. People are actually buying into this rally. Here’s the rally. Now, next thing on the chart to observe, and this is the most important thing on this chart to look at before we get into the nitty gritty indicators, is the chart itself, the price trend, and what you can see is we had a pretty strong neckline at around, I’m going to call it just under 13,000 and it broke that, went down as low as 11.5 at one point or very close to it.
And now it’s at the moment of truth. And that is that it’s got to break this neck line to the upside. Now I don’t mean by a day or two. I mean, it’s got to break and stay there for at least a couple of weeks, preferably three weeks, before we can say that the NASDAQ has put in a bottom, and that would probably set up that we’ve taken out that low and that low and possibly we would be beginning in a consolidation pattern of some sort, but we’re not there yet. So I am not saying that this is the time to buy the NASDAQ. What I am saying is that there is some interesting observations to be made that we may be setting up for a bottom in the coming month, two months, three months, four months, whatever that may be. All right. So on the nitty gritty indicators, you can still see that stochastics is generally trending down.
Although it’s doing an oversold bump up, and generally when stochastics gets as low as it had then you can actually see a pretty good rally if you get that cross. And it possibly is doing that right now. So that’s in its favor. The other thing that we’re seeing is we’re seeing RSI had gone below the trigger line of 30 and is now crossed over. That’s a positive thing. You can see when these conditions have happened in the past, like in 2020, and like in late 2018, does anybody remember the December crash of 2018 where the stock market fell about 25%? Well, these, these moments in time were when we saw a signal from RSI going from deeply oversold, moving up. stochastics, going from deeply oversold and crossing over and moving up and MACD. So this is the missing piece of the puzzle for right now, because you see, we did get a MACD crossover, and we were just looking at the MACD a moment ago. The MACD is still pretty deep.
It’s still moving down. Now, ignore this line at the bottom folks, it’s money flow, and we already know money flow has been in a bad place. So there’s, although as we saw on the momentum indicator, it may be starting to move up. Whatever the case, I would not be looking at the market as a positive mover until we get that crossover. Now MACD, as you can see, is a late mover. So you want to see the hook, there’s the hook, and you wanna see the crossover. Now, the actual bottom of these two troughs occur when Stochastics and RSI were at lows below the 30 line and crossed over. But the safest place to enter is generally when you see a crossover. Either way, you know, choose your poison. We’re not there in any of those conditions. We’re seeing yes an RSI oversold.
We’re seeing a crossover on stochastics, but those are very short term indicators. The MACD is nowhere near hooking up. It’s at best flattening right now when we take a close look at it. There is some positive divergence like I mentioned on the last slide for the overall composite. The MACD is starting to see the histogram diverge positively. That’s a good thing, but we want to really see this line hook up before we even consider buying for a long term position. Now you can trade it, and that’s what I’ve been doing, but you can’t, in my opinion, take an aggressive stance on jumping on the NASDAQ until we see that hookup and, preferably, the MACD crossover. So we have the setup. We have that neck line that we’ve got a challenge going back to the original observation. If the neck line is challenged, if it’s broken to the upside, you’ll probably see the MACD hook up and you’ll probably see an eventual crossover if that break through the neck line can carry through. None of those conditions are here right now. So this is a heads up for you to have an idea of when you might want to consider stepping back in. And I’m making an assumption that, if you’ve been reading my blog, that you were selling out earlier this year, so you hopefully have some cash. And my observation right now is pretty soon, whether it’s a month from now, or maybe a little longer, but probably not a year from now.
Pretty soon, it’s going to be time to start looking at aggressive growth strategies and the NASDAQ is kind of the embodiment of those stocks, right? So I hope that gives you food for thought, not food for trading off of, obviously, because I don’t think the conditions are there for me at least to enter back into the NASDAQ with too much confidence, but the setup is there. And it’s really important to have a game plan ahead of time, rather than operate on gut feelings or with lightning fast reflex as soon as you see the market move without some technical confirmations to give you the evidence and the conviction to go in with some real money and not take unnecessary risks with your capital. So I hope that helps and we’ll be back next week with a very important video.
And I do hope you catch the video next week. I’m going to be interviewing seasonal expert Brooke Thackray, and we are going to do a special half hour video and we’re going to banter back and forth. Brooke talking about the seasonals and he’s also a very good technical analyst, and me observing the markets from my perspective. We’re going to talk about what the S&P 500 is going to do, and we’ll get into some sectors as well. I think it’ll be a really interesting stimulating conversation. And I don’t know if the video will be published next week. We’re recording it next Wednesday, but we’ll get it out as soon as we can and I will talk about it on my blog. Again, go to ValueTrend.ca, and subscribe to the blog so you find out about all this good stuff. All right. Thanks for watching. See you next time.
