Classic Technical Analysis For The NASDAQ

06/06/06 01:07:23 PM

by Arthur Hill

Two classic patterns in technical analysis was at work in the NASDAQ, pointing to a continuation of the May decline.

Security: $COMPQ
Position: Sell

The first classic pattern is not so much as pattern, but rather a basic tenet of technical analysis: Broken support turns into resistance (Figure 1). The NASDAQ fell off a cliff in May and broke support at 2235. The January, February, and March lows marked support in this area, and the support break carried on down below 2150. Once broken, 2235 turned into resistance and the index failed at 2235 over the last few days.

FIGURE 1: NASDAQ, SUPPORT & RESISTANCE. This is not so much a pattern as a tenet: broken support turns into resistance.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

The second pattern at work is a bear flag (Figure 2). The May decline created an oversold condition and some sort of bounce or consolidation was required to alleviate this condition. The index bounced over the last few weeks and formed a rising flag. Bear flags form after a sharp decline and slope up. This was enough to alleviate the oversold condition, and the index broke the lower flag trendline with a sharp decline on Monday.

FIGURE 2: BEAR FLAG. Bear flags form after a sharp decline and then slope up.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

The flag break signals a continuation of the May decline, and the October lows look like the next stopping point. A flag is also said to fly at half-mast, and a decline similar to the May decline can be expected. This would imply a move to around 2030–2050 or a 220-point decline from the flag high. The October low is at 2025, and this will be the downside target as long as the flag break remains in force.

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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