Is The NASDAQ Composite Index Due For A Correction?

By Jim Donnelly, Olson Global Markets

After a near test of long-term trend line resistance currently sitting at 3,660, two big cap tech stocks, Microsoft (MSFT) and Google (GOOG) posted disappointing Q2 earnings results last week causing the NASDAQ composite Index (IXIC) to dip by 0.66% on Friday. Although MSFT and GOOG fell by 11.40% and 1.55% respectively, with a number of other names including Apple (AAPL), Mattel (MAT), eBay (EBAY), NVIDIA (NVDA), Yahoo! (YHOO) and Intuit (INTU) posting losses of between 1.22% and 2.82% and with Intuitive Surgical (IRSG) plunging by an outsized 6.83%, the overall index did only fall by only 0.66%. That is because a number of healthcare, retail and data storage devise maker stocks posted healthy daily gains.

Still, with overbought conditions currently present on the NASDAQ Composite Indexes’ long-term chart, and with long-term trend line resistance sitting at the 3,660 level at the moment, further upside gains appear to be limited over the short run.

Nevertheless, U.S. economic conditions continue to show slow, but steady improvement despite higher gasoline prices, continued European woes, concerns over the economic health of China and growing municipal calamities highlighted by the city of Detroit. Back-to-school shopping, the “wealth effect” of both higher real estate and equity prices, and an improving jobs market could team up to keep consumer optimism positive for months to come.

Moreover, as long as Fed Chairman Bernanke and the FOMC believe that the unemployment rate is too high and the “risk” of an inflation surge is low, monetary policy will remain highly accommodative. This suggests that equity market corrections will likely remain limited as well. As a result, a test of former trend line resistance (now support) at the 3,309 level on the NASDAQ Composite Index could become a buying opportunity, if it were to unfold. A solid break below that support area, on the other hand, would imply that a broader correction could be in the works instead.


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