A Triple Bearish Play Hits The Nasdaq

03/17/05 08:15:25 AM

by Arthur Hill

After running in place for two months, the Nasdaq has started breaking down with momentum and money flow confirming.

Security: $COMPQ
Position: Sell

On the price chart, the Nasdaq declined sharply in January 2005 and then traded flat. This was basically a consolidation or resting period, and the odds favored a continuation of the prior move. The pattern looks like a triangle, and the lower trendline break (red oval) signals the continuation lower. The target is the support zone around 1900-1950 and this area extends from the October consolidation. In addition, a 62% retracement of the August-December 2004 advance would extend to around 1920, further confirming the support zone.

Momentum confirms the support break. The moving average convergence/divergence (MACD) is one of the simplest and most effective momentum oscillators that uses moving averages to ensure a bit of trend-following. The indicator declined sharply in January and then worked its way back to the zero line in February and March. This is normal, as the consolidation marks a period of flat trading and momentum should revert back to neutral or flat (zero line). The MACD failed to make it into positive territory to turn momentum bullish, instead moving below its signal line to confirm the triangle support break in the index (red oval).

Figure 1: Nasdaq, Chaikin money flow, MACD. The Nasdaq declined sharply in January 2005 and then traded flat. This was basically a consolidation or resting period, and the odds favored a continuation of the prior move.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

A move into negative territory by the Chaikin money flow (CMF) rounds out the bearish picture. CMF remained largely positive during the rally and turned negative with the January decline. There was a blip into positive territory at the end of February, but this was short-lived and the indicator moved into negative territory again. The CMF has no relationship whatsoever with MACD and acts as a good confirming indicator.

As long as these three bearish items remain, the Nasdaq is expected to move lower. For signs of strength, look for the MACD and the CMF to turn positive. As long as they remain in negative territory, downward pressure should continue for the Nasdaq.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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