Buying Into The Nasdaq On A Dip

02/02/04 10:11:14 AM

by Ashwani Gujral

One of the key elements of swing trading and the lowest risk method of trading is buying on a retracement to the main trend. The Nasdaq composite has been correcting for the last few days -- at which levels should you buy back in?

Security: NASD COMP
Position: N/A

Entering trends on retracements is probably the lowest risk method of trading stocks. This not only ensures that traders do not catch the bottom or the top of the move but also gives close stop-losses, thus reducing the overall risk of the trade. The key element is to identify the main trend, confirm its strength using the ADX, and then use the overbought and oversold indicators to enter in the direction of the main trend during a countertrend move.

Figure 1: Daily chart of the Nasdaq.

Graphic provided by: Stockcharts.com.

Looking at the daily chart of the Nasdaq composite, the main trend is clearly up, and it has started a reaction. The 2000 level was key resistance on the way up and is likely to provide strong support. Also the 50% and the 61.8% Fibonacci retracements lie at the 2051 and 2000 levels. So taking the confluence of these two factors it would be reasonable to assume the Nasdaq composite will turn somewhere between 2051 and 2000. If 2000 breaks, then this might not be a correction -- a trend reversal might be in the offing.

The ADX remains strong on the daily chart. The daily stochastics (7,10) have reached the oversold level and will give a buy signal when the fast line forms a loop and moves over the slow line.

Figure 2: Weekly chart of the Nasdaq.

How is this correction playing out in the weekly chart? The uptrend in the weekly chart appears to be intact as the breakout from the ascending triangle goes through its normal correction to the breakout line. The ADX is rising, which shows the strength of the uptrend. In an earlier article, I had mentioned the Nasdaq composite could reach 2700, and nothing has happened so far to change my view. As the Nasdaq composite completes its correction, the leading sectors and stocks in the index would also complete their corrections and move up further in the ongoing uptrend.

Ashwani Gujral

He is founder of AGIP Securities Pvt. Ltd. which offers money management services, live chat rooms (during market hours) and independent technical analysis consultancy. The company has a big media presence from the likes of CNBC, NDTV Profit, and ZEE Business.

Title:	Chief mkt strategist
Company:	AGIP Securities
	India
Phone # for sales:	9871066337
Website:	www.ashwanigujral.com
E-mail address:	contact@ashwanigujral.com
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