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Two moving averages kept the NASDAQ Composite ($COMPQ) in a wide range throughout August. The first breakout of the 50-day moving average (MA) resistance failed, resulting in a strong downfall, even below the 200-day moving average. However, the 200-day MA support was established immediately by a fast recovery in price with strong bullish indicators. The relative strength index (RSI)(14) held its 30-level support, even when the index moved below the 200-day MA, indicating a reduced bearish force. In addition, the histogram formed a higher low, reconfirming limited downside. These two bullish indications increased the volume, supporting the possibility of a bullish rally. |
Now, the second breakout of the 50-day MA seemed uncertain as the doji candle was formed prominently on the resistance line. But by this time the buyers were already in with good volume, and the histogram has positive divergence, and the RSI (14) continued to remain above the 50 level (Figure 1). The histogram has moved above the zero line with new highs, while the price was stuck at the 50-day MA with a doji candle. Not only that, the RSI (14) has higher lows and higher highs, offering new buying opportunities. |
FIGURE 1: $COMPQ, DAILY. The positive divergence on the histogram and the higher lows on the RSI (14) support the 50-day moving average breakout. The NASDAQ Composite index would soon reach its old high levels. |
Graphic provided by: StockCharts.com. |
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Tuesday's bullish session has closed below the day's high but has established strong support on the 50-day MA. The RSI (14) has moved vertically and indicates bullish strength in this new rally. In addition, the increase in volume would help to sustain the breakout. Thus, this breakout can be bought with previous highs as targets. |
FIGURE 2: $COMPQ, WEEKLY. The lower level consolidation accumulated the strength for a breakout. |
Graphic provided by: StockCharts.com. |
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The weekly chart (Figure 2) supports the breakout. The index has formed a strong bottom at the 2500 level above the 50-day moving average. The RSI (14) has moved steadily above the golden level of 50. The histogram though in negative territory has formed a higher low. So the indicators are bullish on a breakout rally. This medium-term chart also supports buying on a breakout rally. |
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