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Candlestick Warning For The NASDAQ Composite

05/30/07 10:17:59 AM
by Gary Grosschadl

The high-tech index looks vulnerable here. A downturn would not be a surprise, but what are the targets?

Security:   $COMPQ
Position:   Sell

After rising near 300 points from a bounce of its 200-day exponential moving average (EMA), a candlestick warning hits the NASDAQ. A bearish engulfing candlestick pattern can be a strong reversal signal after a strong rise, and this is the current view on this daily chart (Figure 1). Note the last downturn was preceded by a doji candlestick from late February 2007, another top warning.

There are several indicators agreeing with this bearish candlestick outlook. I always look for multiple negative divergences when eyeing any possible swing from a high or low point on a chart. Both the moving average convergence/divergence (MACD) and the relative strength index (RSI) show a move lower while the NASDAQ popped higher. When indicators fail to confirm a new high (or low), the move is often suspect. The stochastic oscillator shows a slightly overbought condition, so a downturn from here would not be a surprise. Previously, this indicator stayed overbought (stuck high) for an extended time, but this was when there was a strong and rising trend via the previously mentioned indicators.

FIGURE 1: NASDAQ. A bearish engulfing pattern warns of a possible top.
Graphic provided by:
Should a downturn ensue, several targets are possible. The first nearby possible support is in the vicinity of the 50-day EMA, currently 2515. This level also relates to a previous support level. A pause or temporary support here is more conceivable than a bounce, but the market will decide soon enough. Stronger support lies once again at the 200-day EMA, currently 2409. This level also relates to the previous support and the bottom of a very large black candlestick. In addition, near the 2500 level, there are two previous gaps. Gaps can also act as areas of support.

Exactly where possible support kicks in remains to be seen, but these are the areas I am eyeing. As always, the market will have the final say.

Gary Grosschadl

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

E-mail address:

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