With stocks reacting poorly to strong earnings reports, and fears rising over interest-rate increases, Jim Cramer checked in with colleague Carolyn Boroden, founder of FibonnacciQueen.com and a contributor to TheStreet's RealMoney.com, in Tuesday's "Off the Charts" segment of Mad Money.
Boroden and Cramer started by looking at a monthly chart of the Nasdaq 100, made up of the hundred largest non-financial stocks in the Nasdaq Composite. Boroden told Cramer she sees several warning signs based on her technique of using Fibonacci ratios to identify key chart levels. The Nasdaq 100 is not far from making a 161.8% Fibonacci price extension of its dot-com era decline from March of 2000 to October of 2002. Boroden notes that many rallies tend to terminate at similar extensions of prior swings, making her want to get more cautious.
For more detail, Boroden and Cramer looked at a weekly chart of the index. Boroden said this one looks more hopeful for bulls. That's because of symmetry -- the idea that rallies or declines tend to be similar in scale. Basically, Boroden points out that the Nasdaq 100's four most recent declines have lasted for anywhere from 850 to 900 points before running their course. After each previous selloff, the index resumed its march higher. So when she sees the Nasdaq 100 down by 863 from its March peak to its early April trough, it suggests that the latest downdraft might be over. Plus, even if the index were to drop 900 points from its March peak, that would still put it above the February lows.
Boroden argues that as the Nasdaq 100 holds above its lows made earlier this month, the odds favor a resumption of the long-term rally. If the index can hold above those levels, her Fibonacci projections make her think that the index could run all the way to 7,420 before it faces much resistance, up more than 12% from where it's now trading.
For more detail on a key snag that could prevent that from happening, Cramer and Boroden looked at a daily chart of the index. The index's recent rally from the April 2 lows put it within striking distance of three important Fibonacci levels. And last week's highs came right around where Boroden would expect a rally to run out of steam.
Boroden's methodology also applies to the X-axis of the chart -- time. She measures the duration of past swings, runs them through her Fibonacci filter and comes up with dates where a stock or an index is likely to change course. The Nasdaq 100's highs last week coincided with at least six of these Fibonacci time relationships that came due between the 16th and the 19th.
Boroden says that when you see a confluence of cycles, you need to anticipate a possible reversal of whatever the index was doing beforehand. Indeed, this is exactly where the index started to falter last week. Now the new ceiling of resistance is around 6,856, up roughly 300 points from here. Boroden thinks it's crucial to clear that hurdle.
Boroden wants to see a couple of things before she's willing to go bullish. The index needs to hold above the February lows at 6,164, and it also has to break out above last week's highs around 6,856. As long as it's between those levels, it's in a kind of technical no-man's land. A break down below the February lows could mean a multi-month decline.
Finally, Boroden and Cramer looked at the daily chart of the S&P 500, which shows a very similar situation. The S&P had a nice bounce going that ran out of steam last week. Boroden thinks the market needs to clear the ceiling of resistance at last week's highs before any kind of rally can take hold. That means a break out above 2,725, up about 3% from here. The S&P also has a floor of support established by the bottom back in February at 2,532, down a bit more than 4% from here. A breakdown below the February lows will mean a lot more downside.
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