Proceed with Caution on Post-Bear Market Nasdaq

The Nasdaq clawed its way out of bear market territory on Friday

The dominant stock market headlines late last week generally seemed to fall under the category of "more of the same" -- speculation over U.S.-China trade negotiations; fresh developments on the politically divisive border wall; shifting Fed policy expectations; hot-and-cold corporate earnings; more Brexit fumblings out of the U.K.; and a dash of dismal U.S. retail sales to add a little variety. And while it wasn't completely overlooked in the financial media, we'd argue that the action in the Nasdaq Composite (IXIC) chart got short shrift amid the week's slate of news, as the massive index lumbered its way toward some major technical milestones.

Significantly, the Nasdaq was the only one of the "big three" equity benchmarks (along with the S&P 500 and the Dow Jones Industrial Average) that formally entered bear market territory during the fourth-quarter 2018 sell-off that swept stocks dramatically lower. Based on the index's Aug. 29 high close of 8,109.69, the Nasdaq entered a bear market as of Dec. 21, when it settled at 6,332.99 -- down more than 20% from that peak.

It was just one trading day later, in the abbreviated Dec. 24 session, that the Nasdaq tagged its low close of 6,192.92. Since then, the index has joined its "big three" counterparts in beating a steep, steady path higher -- as evidenced by the fact that all of these equity trackers closed Friday's trading up more than 10% on a year-to-date basis, led by IXIC's 12.6% advance.

And what makes the Friday action in the Nasdaq so particularly noteworthy is the cluster of key price points vanquished by its weekly closing level of 7,472.41. Most crucially, in light of the preceding discussion, is 7,431.50 -- which corresponds with a 20% gain from the index's low close, and the point above which the Nasdaq is considered to have "emerged" from its bear market. So, with Friday's daily close above this level, the index turned the page on that bearish chapter in just under two months. (Of course, a continued hold above this "bear market threshold" will be crucial in the immediate term -- along with some other levels of note.)

In a little more immediate proximity to IXIC's Friday finish is 7,441.51, which corresponds with the Dec. 3 high close, and 7,486.51, which is the intraday high from the same session. After the major equity benchmarks set lower highs on a bimonthly basis in both October and December (a trend noted in our Todd Salamone's weekly Monday Morning Outlook column), the "acid test" for bulls in the even-numbered month of February is whether or not stocks can snap this trend and break out to new, higher highs. To that end, last week's close in between these two levels -- above the Dec. 3 closing high, yet shy of that intraday peak -- could be fairly described as a step in the right direction.

There are also some historically significant trendlines now just below the Nasdaq's current perch. After once again finding critical support at its 160-week moving average in December, just as it did in early 2016, the index rather easily reclaimed its 80-week trendline (which had cushioned the panic lows of August-October 2015) in mid-January. And at the end of last week, IXIC clawed back above its 40-week moving average, at 7,463.14, which had been breached rather emphatically during the second week of October.

The 40-week moving average for IXIC caught its April 2018 low almost exactly -- but following the October break, the index's attempts to move back above this trendline were consistently thwarted over the following month. Traders with a firm grasp of the calendar will also note that the 40-week is roughly analogous to the widely followed 200-day moving average, give or take a handful of weekday holidays; the 200-day moving average for the Nasdaq Composite is located at 7,465.62, as of Friday's close, which means the index managed to finish the week narrowly above both of these crucial trendlines.

So while the urge to roll out the "Nasdaq Bull Market" banner is strong after last week's admittedly impressive action, we'd advise traders to exercise caution as the index now attempts to solidify its fledgling foothold above these formerly formidable technical hurdles. In particular, with that Dec. 3 intraday high just overhead and the 200-day takeout setting up a potential repeat of the short-lived advances above this moving average that took place in mid-October and early November, jittery investors -- in the face of a considerable number of lingering macro-level uncertainties -- could view the Nasdaq's incursion on these levels as an excuse for profit-taking.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 17.