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CONSOLID FORMATION


Nasdaq 100 Moves Into Consolidation

02/24/04 08:31:27 AM
by Ashwani Gujral

All rallies need a consolidation phase to build momentum for the next upmove. At least this is my conclusion based on the recent action on the Nasdaq 100. The Nasdaq 100 is likely to trade in a range until it decides on the direction it wants to take.

Security:   NDX
Position:   N/A

The Nasdaq 100, after a recent sharp rally, has formed a lower top on the daily chart that has weakened the rally considerably. But it would be premature for the bears to come out of hibernation as the market is likely to consolidate rather than fall very sharply. Only after the consolidation or the distribution pattern is complete can I comment on the direction of the index. The best way to play these consolidations is by selling near month straddles or by just staying out. If you play consolidations, do it with one-third of your usual volume. Money is more often made in trends rather than consolidations.

Figure 1: Daily chart of the Nasdaq 100.
Graphic provided by: Stockcharts.com.
 
The daily chart shows the Nasdaq 100 making a lower top, indicating that immediate upside is unlikely. The region between 1350 to 1450 is a very strong support zone for the Nasdaq 100 and until it consistently maintains above it, the Nasdaq 100 will continue to remain in a consolidation. Below this range the bears would gain control of the index. The ADX has declined from above 40 to below 20, indicating that there is no clear trend. Traders should avoid taking positions in a declining ADX environment below 20 because, other than day traders, the swings are too small for any sensible trades to be taken. The Nasdaq 100 will stay range bound between 1550 and 1350 for the foreseeable future.


Figure 2: Weekly chart of the Nasdaq 100.

The weekly chart supports the earlier bullish view. It seems likely this rally will now stall before moving on. The ADX has fallen below 30, indicating consolidation, and the long-term moving average still continues to be bullish. In these situations it is best to identify the range - which in this case is likely to be 1550 to 1350 - the market is going to trade. Then the trader should book profits on the higher end of this range and look to buy again at the lower end. This is a simple sounding strategy but in reality is difficult to implement too many times in the same consolidation. So don't overdo it - Consolidations take away money made during trends.



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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