|It's been a good run for the high-tech index since the summer of 2004, as Figure 1 shows. This weekly chart shows a definite uptrend, and a pitchfork view or Andrews line highlights this. The good news is that an uptrend is in place, while the bad news is that a significant downleg may be in store affecting short-term and/or medium-term traders.|
|Note the history of bearish engulfing candlestick patterns marking sizable downlegs. These are large bearish candles that engulf the previous candlesticks. These can be reliable turning points after a good upleg. After the latest 450-point rise, another such bearish candlestick pattern has struck.|
|FIGURE 1: NASDAQ, WEEKLY. There's a definite uptrend, and a pitchfork view highlights that.|
|Graphic provided by: StockCharts.com.|
|Several indicators hint at a coming downleg. The average directional movement index (ADX) line at the top of the chart may have peaked, as it is above the positive directional index (+DI) and it has flattened out.|
The moving average convergence/divergence (MACD) shows a downturn from peak levels, while its histogram shows a definite downtrend. The relative strength index (RSI) also seems to be coming off its own peak from the 70 level. Meanwhile, the stochastic oscillator hovers in an overbought condition but needs to decline below the 80 level to confirm a negative follow-through.
|Two downside targets are possible. The first is a zone between 2300–2350 representing the median line of the pitchfork and a previous support point. The larger downside target is the lower pitchfork median line and the 200-period exponential moving average (EMA) near 2100. Watch these targets for another possible turnaround situation, should a downleg develop from the current position.|
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