|The indices seem to have stalled a bit -- looking at the chart below, it is no wonder. The Nasdaq has been the big leader thus far with its unmatched exuberance. Perhaps now the Nasdaq is faced with a formidable challenge, this being the ever powerful 200-period EMA. Traders have learned to respect the 200-period moving averages in all time frames as reversals often occur here and no doubt trading targets are placed here as well.|
|Nasdaq's weekly chart showing several reasons for concern.|
|Graphic provided by: Stockcharts.com.|
|No trader should go with any single indicator but rather look for a weight of evidence from a number of trading tools. So with this in mind I've included several other indicators in my analysis. To begin with, there is a potential bearish rising wedge shown on the chart. A move below the lower trendline on large volume would be a signal that a breakdown is likely underway. A move to test this lower trendline would entail a move down to 1760. A move past the upper trendline would be a bullish signal negating the bearish warning of the wedge. With the 200-period EMA coinciding with the upper trendline there is added resistance, making a move either way potentially noteworthy.|
|My other concerns are the multiple negative divergences and stochastics. Any time several negative divergences are occuring, the notion of a correction of some sort is more compelling. The five green arrows mark the various convergences. As the Nasdaq has pushed higher, these indicators have failed to follow suit and in so doing, cast doubt in this latest bullish move being sustainable. Two of the more compelling divergences come from lower volume (most obvious from smaller spikes) and the Chaiken money flow indicator hitting a lower high. Both of these point to less conviction coming from buyers at a point where the index is straining higher.|
|Lastly the stochastics series are in overbought territory. A shorter term series is displayed with the more commonly used 14-period setting. I often note that bigger moves occur when both of these move in tandem from either overbought or oversold levels. A move below the 80 level from both series would imply a more serious stochastic downleg. In this case that would be a move down to oversold levels of 20 or less.|
In summary, a strong move either way past the wedge's trendlines should make for a potentially substantial move. Right now the weight of evidence seems to favor the bears but as always the market will have the final say.
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