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FLAGS AND PENNANTS


The NASDAQ 100 Winds Up For The Pitch

12/13/06 10:25:12 AM
by Arthur Hill

A narrowing consolidation can't last forever, and the NASDAQ 100 looks poised to break the recent trading range. Here's what to look for.

Security:   $NDX
Position:   Accumulate

The NASDAQ 100 has been on a tear since mid-July, with a 25% advance in just over four months (Figure 1). Since moving above 1800, the advance slowed over the last few weeks and a pennant formed. These are continuation patterns that represent a rest in the ongoing trend. The big trend is up and this pattern represents a bullish consolidation.

FIGURE 1: NASDAQ 100. The NDX has been on a tear since mid-July, with a 25% advance in just over four months.
Graphic provided by: MetaStock.
 
The November surge added 100 points to the index and it became overbought. There are two ways to work off overbought conditions: correct or consolidate. The NASDAQ 100 chose a little of both. There was a sharp decline on November 27 and then a consolidation over the last two weeks. Taken together, the pennant formed and the next signal is dependent on the direction of the breakout.

A move above the upper trendline and early December high would be bullish. The upside target would be around 1860–1870 (Figure 2). This was found creating a trendline parallel to the lower pennant trendline and extending it up for two weeks. Should the NASDAQ 100 break resistance, the breakout point would turn into support and this would be the first test. The early December low would mark key support.

FIGURE 2: NASDAQ 100. A move above the upper trendline and early December high would be bullish, with the upside target about 1860 to 1870.
Graphic provided by: MetaStock.
 
A move below the lower trendline would be bearish and open the door to further weakness. The downside target would be to around 1720–1730 (Figure 2). This was found by creating a trendline parallel to the upper pennant trendline and extending it down for two weeks. The support break would turn into resistance, and this is the first level to watch for signs of a failed signal. The early December high would mark key resistance.



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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Date: 12/15/06Rank: 4Comment: 
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