NASDAQ Channels Higher

11/16/06 11:28:20 AM

by Arthur Hill

Despite a warning shot from the stochastic oscillator, the NASDAQ remains in a rising channel and trend has yet to bend.

Security: $COMPQ
Position: Hold

The price chart shows the NASDAQ Composite with a linear regression channel (Figure 1). This linear regression channel is made up of three lines. The middle line is the linear regression itself. Based on the closing prices from July 21 to November 15, the linear regression is the line of best fit. Some closes are above the line and some closes are below. The upper and lower trendlines are parallel and equidistant to the linear regression line, which makes the channel symmetrical.

The trend is clearly up as long as the lower channel trendline holds. The upper trendline acts as resistance and a move above this trendline would signal an overextended situation. The lower trendline acts as support and a move below would break the channel. As it now stands, a move below 2350 would break the lower channel trendline and we could then entertain thoughts of a downtrend. As long as the channel holds, the NASDAQ is rising and a move toward the upper trendline is expected (2570!).

FIGURE 1: NASDAQ. The index remains on an uptrend and has yet to show signs of faltering.

Graphic provided by: MetaStock.

Despite a clear uptrend, the stochastic oscillator fired a warning shot in early November. The stochastic oscillator moved above 80 in August and held above 78 from August 17 to November 2. This is quite extraordinary and reflects the strength of the current uptrend. The stochastic oscillator dipped below 65 on November 7, and this is the first sign of weakness in months. I do not consider this dip bearish, but it does point to vulnerability as the NASDAQ becomes overextended. I would consider momentum to be bullish as long as the stochastic oscillator holds above 50. For a medium-term trend reversal, I would look for the NASDAQ to break 2350 and the stochastic oscillator to break 50.

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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