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Nasdaq Composite Breaks Overhead Resistance

08/30/06 03:56:02 PM
by Gary Grosschadl

The high-tech index hit a 2006 high of 2375 in April and then fell more than 300 points into the dog days of summer. Now an upleg is under way.

Security:   $COMPQ
Position:   Buy

As Figure 1 shows, the NASDAQ Composite has closed above the ever-important 200-day exponential moving average (EMA). The initial drop below this average last May confirmed a serious downleg was under way. Likewise, this fresh close above this moving average may signal a continued upleg.

An Andrews pitchfork is plotted using three major turning points. This method of determining support & resistance uses parallel lines. This upward-facing pitchfork remains bullish as long as the lower median line is not violated (currently near 2050). Pitchfork theory holds that a move to the median line is likely to be followed by an eventual move to the lower median line to test support. Under super bull conditions, a move above the median line can lead to a possible test of the upper median line.

FIGURE 1: NASDAQ COMPOSITE, DAILY. Here's a pitchfork on the NASDAQ Composite.
Graphic provided by:
Several indicators are considered. At the top of the chart, the average directional movement index (ADX) line is in a very bullish mode being above 25 and upsloping between the DIs or directional indexes. This indicates a strong bullish trend. Below the chart, the moving average convergence/divergence (MACD) also shows a bullish stance having moved above the zero line. Note the previous positive divergence that foretold a coming rise. As the composite index made a lower low, the MACD went in the opposite direction. The stochastic oscillator shows a bullish high turn but reminds us that this is considered an overbought situation. However, if the trend is strong enough, this oscillator can "stick" high for an extended time.

In summary, the current trend is bullish and a likely upside target is the median line, currently near 2270. A close below the 200-day EMA would be bearish in the short term and could lead to a test of downside support at the lower tine of the pitchfork.

Gary Grosschadl

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

E-mail address:

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Date: 09/01/06Rank: 3Comment: 
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