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Break and test

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One of the first "techniques" I learned when incorporating technical analysis into my investment career was how a stock or index acted around its 200-day moving average. On December 4th we witnessed the NASDAQ Composite (COMPX) break above a downward trending 200-day MA, and last week the NASDAQ Composite pulled right back in and testing this now flattening out 200-day MA. So far so good for the bulls and they may be starting to get an upper hand on things.

NASDAQ-Composite Index Chart - Daily Interval

After breaking above its 200-day MA on December 4th, the NASDAQ Composite (COMPX) looks to have successfully tested this key moving average that had been resistance prior to 12/04/01. If you're a believer in the saying "old resistance becomes support," then equity bulls like what they see so far. Look for a move above the $2,011 level as point where we may see further bullishness. There aren't a lot of profits being carried for the 2001 tax year, and tax loss selling should be nearing an end. This could well create a shift in supply/demand near-term and make for a bullish early January.

Securities Broker/Dealer Index - Daily Interval

The Securities Broker/Dealer Index (XBD.X) is once again battling its only remaining downward trend from the September 11, 2000 high near $708. With retracement defining the range, a break above 50% retracement could have bulls coming into the sector in stampede fashion. Notice a similar break above the 200-day MA and "re-test" that we are now seeing in the NASDAQ-Composite. Not that the two really have than much in common, other that some of the technicals mentioned above. Should the XBD.X make a break for higher ground, that may signal market participants that trading revenues along with renewed interest in IPOs (Initial Public Offerings) and merger/acquisition activity is looking better for the future. All three could be confirming signs that a new bull market is at hand.

Jeff Bailey
Senior Market Technician
Option Investor

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