Today is March 1, 2006

The above chart is a picture of the NASDAQ during the time of the trendless market - present. When the indices broke out of the trendless market to the upside we believed that volatility would be picking up in the weeks and months ahead. By looking at the indicator below the chart, you can see that this hasn't happened. Volatility is still extremely low. Nonetheless, there are still gains to be found in this market. The Russell 2000 is up over 18% since our buy signal at the end of June, our 401k allocation is up over 15%, the S&P 500 is near multi-year highs, and the NASDAQ 100 is up almost 13% since our June buy signal. Gains have been slower than we would hope for, but they are still healthy gains. This is a time to learn more about market timing through our commentaries, and a time to develop the most important virtue to an investor - patience.


Commentary

As mentioned above, many of the indices we follow are at or near multi-year highs. The one bearish ingredient that remains is the head and shoulder formations in both the NASDAQ 100 and the Semiconductor ETF - SMH. It is important to note that the NASDAQ Composite, S&P 500, Russell 2000, Dow Jones Industrial Average, and the Semiconductor Index are not in this bearish formation. Yes, the Semiconductor ETF is in the formation, but not the index itself.

We have labeled the two shoulders and the head in the two charts below. There is an alternate look to the NASDAQ 100 which is more bullish, but as we are looking at the worst-case scenario, we are only showing the more bearish head and shoulder formation. As it now stands, the NASDAQ 100 would need to break above the resistance line shown to know for sure that this formation has been invalidated. The lower line shown is the neckline, a line that is crucial for the NASDAQ 100 to stay above if the long-term uptrend is going to continue.

The second chart of SMH is quite similar. Here, we do not have an alternate head and shoulder formation that is more bullish. The good news with this chart is that today's move suggests continued strength. If this was a head and shoulder formation, you would not expect to see such strength at the end of the second shoulder. If SMH breaks above the resistance line shown, we will know that this formation is not valid. The blue uptrend line on the chart is the neckline for the formation.

We believe that the markets are still in a long-term uptrend. The two charts below are only showing the most bearish scenario. We do not think these formations will play out to the downside. The Investors Intelligence ratio was released today and currently 42.6% of newsletter writers are bullish, compared to 60.4% bullish at the end of last year! This is definitely a turn for the positive and supports our view that this long-term uptrend will continue.

Take Care,

Stephen Brown
Founder of Nasdaq Wizard, LLC