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NASDAQ's Tricky Pattern Could Go Either Way

06/20/06 09:53:01 AM
by Gary Grosschadl

Last autumn, the NASDAQ displayed a bearish pattern, but then the bear went into hibernation. Now that the bear is awake and flexing his muscle, was the pattern right all along?

Security:   $COMPQ
Position:   Hold

When classic patterns fail, they can point to a hard run in the opposite direction. Many traders spotted this potentially bearish pattern, referred to as a rising wedge. However, this index continued to break outside of the wedge, seemingly negating the bearish implication.

But there were some nagging details that market technicians would have noted. Volume was increasing, but it was not convincing. Breakout volume is ideally large or exceptional, and this was neither. Further, several indicators showed telling negative divergences to price action, as noted via the moving average convergence/divergence (MACD) and the relative strength index (RSI). This, correctly, pointed to a coming decline.

FIGURE 1: NASDAQ COMPOSITE. Is the previous bearish rising wedge now coming into play?
Graphic provided by:
Now that the pattern has finally broken to the downside, what are the implications? The move below the lower trendline is bearish, but the 200-period exponential moving average (EMA) may provide support, as the hammer candlestick is hinting. The question is whether this is brief support or a lasting bounce. It should be noted that the two previous dips went below this EMA.

A move back inside the wedge would be bullish, as the 200-day EMA could be seen as a launchpad for another thrust to challenge new highs. On the other hand, failure between the 200-day EMA and the lower trendline could signal a lower test of support (see Figure 1).

Should the bear regain strength, the most common Fibonacci retracement levels (roughly 1/3, 1/2, 2/3) are shown. These take into consideration the high and low on this chart.

What makes these levels more compelling are the alignments to previous support levels as highlighted by the black arrows.

Should the bear approach these levels, look for bounce opportunities as the streets are bloodied.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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