A Review Of The NASDAQ Composite


Screen Shot 2014-06-17 at 11.12.19

Video Transcription:

Hello traders. Welcome to the stock trading course and the second module, stock market indices. In the lesson we’re going to review the Nasdaq Composite. We’re going to define the Nasdaq Composite and we’re going to also learn how to use it.

What is the Nasdaq? The Nasdaq is the exchange where technology stocks are traded. I think most of you already knew this. The Nasdaq Composite is an index of all stocks traded on the Nasdaq stock exchange. We’re talking about more than 3000 companies in this index. It includes all Nasdaq listed stocks, including preferred shares, funds and exchange traded funds, or ETFs. More on ETFs on the following module. In fact, we’re going to have a module dedicated only to ETFs, how to daytrade ETFs and profit from them.

nasdaqcompositereview 1

Let’s break down the Nasdaq a little bit. The Nasdaq Composite includes companies that are not based in the U.S, like the SMP 500s and the Dow. It also includes stocks from financial, industrial and insurance industries but on a much lesser percentage. The Nasdaq also includes large-cap and small-cap companies, as well as more speculative firms with a very small market cap. Here we’re talking about very small cap companies. Because this is a market capitalization weighted index, small and micro cap companies don’t have as much influence in it as large cap companies, but it’s still a benchmark for sentiment towards more speculative stocks as well as the performance of the overall technology industry.

If you’re trading in penny stocks and small cap companies, it would be wise for you to follow the Nasdaq. If you’re a technology trader, of course you have to be on top of the overall Nasdaq Composite price action.

Another thing about this index is that it’s a more volatile index, and you’re going to see how much more volatile it is when we go to our chart. Right here we have a chart of a Nasdaq Composite. As you can see, we have huge gaps on the daily time frame. This is why I was telling you that this is a very volatile index. You can see for example like right here, we closed this day at 4,876 and we actually opened the next day at 47,898, with a huge gap that was actually never closed by price action. It was closed until the close of this day at 4,888 about two weeks later. If you go back in price action, you can see that you have gaps all throughout price action on this index.

nasdaqcompositereview 2

Let me just zoom in and let’s see how much or how deep its corrections have been. We have zoomed in, so we have the price action from January, 2013 until today. We have about two and a half years of data here and as you can see, from this low we were in a very strong boom market. Right here we have the first deep corrective move from this high to this low, for about 9.43% correction, which is not as deep as the corrective move we had about a couple of weeks ago on which Apple lost more than one quarter of its market cap.

Look at the difference between this 9.43 corrective move to the downside, with this corrective move. The sharpness of this corrective move is much, much larger than this one. Let’s go to the second corrective move, which is this one right here. If we go from the high to the low, we corrected about 10.52% on the negative side. This corrective move is also much steeper than this one. As you can see, we’re still in a boom market but the corrective moves are going to be steeper and steeper.

nasdaqcompositereview 3

This one, which it attracted a lot of panic in the market, you can see that the Nasdaq Composite actually corrected 17.84% and it actually went down from this high to this low, which is about six days on -15.91%. You can see that the Nasdaq is actually much more volatile and it has become much, much volatile today than the other indices that we have gone through. This is because not only the Nasdaq has the biggest technology stocks in the market, but it also has a lot of speculative stocks in it.

Comments are closed.