10 Sep DOES THE 90-10 RULE HAVE ANY BEARING?
The NASDAQ 100 rebounded about 2.9% following a three-day 11% rout. As widely discussed the move from March’s low is perhaps the most imbalanced in history and the recent decline is insignificant if one purchased the largest technology shares almost six months ago.
Many years ago, when the market was dominated by fundamental analysts, I recall attending a presentation by one of the few technical analysts of the day, Alan Shaw…aka the “God Father of Technical Analysis.”
Shaw referenced the 90-10 rule which essentially states there is a 90% probability that a security or index will retrace 90% of a parabolic move, bottoming about 10% above the price where the rally commenced. The issue at hand is where the issue/index will top.
If this rule is to pertain today and if you think a 83% five month rise in the NASDAQ 100 is parabolic, then hypothetically the NASADQ 100 should decline to around 7300. The NASDAQ 100 closed yesterday at 11,395 or about 1,044 below its September 2 peak.
If the above does occur, the approximate 41% decline would be about half of the 80% decline the NASDAQ 100 experienced in 2000 when the dot com bubble imploded.
As noted many times and as per First Trust, approximate 6 years of sales were compressed into six months for the mega sized technology companies. Based upon First Trust, the NASDAQ 100 issues may be fully priced.
And if the “God Father of Technical Analysis” 90-10 rule is of any bearing; yesterday’s NASDAQ 100 advance is nothing other than a dead cat bounce. Unfortunately, only history will answer this question.
What will happen today?
Last night the foreign markets were mixed. London was down 0.60%, Paris down 0.22%, and Frankfurt up 0.09%. China was down 0.61%, Japan up 0.88% and Hang Sang down 0.64%.
The Dow should open nominally lower on questions as to whether the rout in tech shares is over. The 10-year is unchanged at 0.70%.