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Candlestick Warning For The NASDAQ Composite05/30/07 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?
|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: StockCharts.com.|
|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.|
Independent Canadian equities trader and technical analyst based in Peterborough
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