A Big Test Looms For The Naz

02/28/07 09:50:41 AM

by Arthur Hill

The NASDAQ came crashing down on Tuesday, February 27, but support is at hand and the November–December 2006 lows hold the key to a medium-term reversal.

Security: $COMPQ
Position: Hold

The NASDAQ surged from July to late November 2006 and then worked its way higher from late November to late February 2007. As the moving average convergence/divergence (MACD) confirms, upside momentum was strong in the first half of the advance (July–November) and weaker in the second half (December 2006–February 2007). Even though momentum was not its old self, the MACD remained positive over the last two months and momentum never actually turned negative. The big negative divergence is definitely cause for concern, but the MACD needs to move below zero to turn momentum fully bearish and this would likely coincide with an acceleration lower in the index.

FIGURE 1: NASDAQ. The index gapped down and formed a long black candlestick on high volume.

Graphic provided by: MetaStock.

On the price chart (Figure 1), the index gapped down and formed a long black candlestick on high volume. This is the highest volume since late June and shows a pronounced increase in selling pressure. Moreover, the gap looks like a breakaway gap and this should be considered short-term bearish unless it is filled. Breakaway gaps often start trends, and this could mark the start of a medium-term downtrend.

FIGURE 2: NASDAQ. There is a lot of support around 2400 and the Naz held support on February 27. In addition, the index forged higher highs in January and February.

Graphic provided by: MetaStock.

Not so fast, cowboy! There is a lot of support around 2400 and the NASDAQ held support on Tuesday. Support at 2390 stems from the November–December 2006 lows. In addition, the index forged higher highs in January and February 2007. A definitive lower low has yet to come in and the uptrend is still in place, technically speaking. A break below the November–December 2006 lows would forge a lower low and argue for a trend reversal. I would then expect at least a retracement of the July–November advance. Normal retracements run 50–62% and this would target a decline to the 2211–2273 region.

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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A Big Test Looms For The Naz

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