One of my favorite chart guys, Trader Mike, does a far better job with a picture than I can with words of showing you where we are in the markets with this Nasdaq chart. This is the same kind of triangle squeeze we pointed out in weekly chart of the transports back in September just before they exploded up.
The Nasdaq weekly chart also has a bit of the same formation but, like I said on Monday: “Nasdaq 2,475 will not be that impressive but is absolutely necessary for escape velocity.” You can see from the wedge above the daily how 2,450 just isn’t going to do it!
The Nasdaq, like all stocks, is governed by some pretty simple physics.
What we have in this chart, along the dotted line, is an actual picture Kepler’s third law of motionin action as the Nasdaq forms an elliptical orbit as it attempts to escape. By simply applying the following formula we can see where the Nasdaq is going:
- T = time since the last crash
- a = total number of points gained
- G = bearish sentiment + bad news
- M = total value of the global market
- m= total value of the Nasdaq
In absence of new fuel (inflows), we can expect some sideways drift – something has to change in the formula (kidding about being able to predict where we are going by the way!) for us to break orbit.
Time acts as a pull, the longer it takes the more points you need to gain to make it impressive. We already know bearish sentiment is very lowso we are unlikely to make progress there and as the global markets and the Nasdaq expand (M+m) it means you need A LOT more inflow (a) just to maintain your ellipse.
To help explain this further I will liberally plagiarize Wikipedia’s excellent article on Plantetary orbitsand change it to apply to an IPO:
As an illustration of the orbit around a planet (eg Earth), the much-used cannon model may prove useful (see image below). Imagine a cannon, which we will call Goldman Sachs, sitting on top of a (very) tall mountain (their money and…