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BREAKOUTS


$COMPQ At New High

03/15/12 02:26:34 PM
by Chaitali Mohile

Recently, $COMPQ breached historical resistance. Can a small bearish rally discourage the bullish breakout?

Security:   $COMPQ
Position:   Buy

The NASDAQ Composite ($COMPQ) has formed a short-term ascending channel in Figure 1. The bullish rally has pretty much been in place since the beginning of 2012 as can be seen on the daily chart. After a bullish moving average crossover, the 50-day moving average (MA) surged in the direction of the price action, extending an immediate support to $COMPQ. The upward journey of the relative strength index (RSI) (14) and the bullish MA crossover indicated bullish strength in the rally. Gradually, the average directional index (ADX) moved above the 20 levels, suggesting a developing uptrend. Thus, $COMPQ had a power-pack of bullish support to climb higher.

FIGURE 1: $COMPQ, DAILY
Graphic provided by: StockCharts.com.
 
During this journey, price moved closer to the lower trendline support of the channel. A bearish breakout of the ascending channel is considered to be a major bearish indication for any stock or index. As $COMPQ was inching toward a new high, the indicators in Figure 1 turned extremely bullish. The RSI (14) turned jittery in an overbought region, an overheated uptrend began descending, and the moving average convergence/divergence (MACD) (12,26,9) underwent a bearish crossover in positive territory.

All these bullish reversal signals indicated that the rally may be overheated indicating the possibility of a correction. The rally breached the ascending channel heading downward, initiating a fresh rally toward the two moving average supports. The small red bearish candlesticks showed upcoming bearish pressure.

Due to the two moving average supports, the bearish rally is likely to reverse after a few tricky trading sessions. The downside rally would create room for the prior bullish action to continue.

Currently, $COMPQ is trying to regain those lost levels. The RSI (14) is surging with the support of the center line, and so, the bullish strength seems to be returning.

According to the monthly time frame chart, $COMPQ has breached a major resistance at 2800 levels. The index has plunged twice from this resistance, so this bullish breakout would be the most reliable one. But the weak trend indicator and a negative divergence of RSI (14) in Figure 2 suggest that the breakout rally may be facing some pressure.

The MACD (12,26,9) in Figure 2 is frequently changing its direction in positive territory, suggesting high volatility, and hence sustaining at the higher levels would be a tug of war for $COMPQ. Due to the volatility clouds, the index can plunge a few points from the top. However, the newly formed support would protect the long positions of long-term traders and investors.

FIGURE 2: $COMPQ, MONTHLY
Graphic provided by: StockCharts.com.
 
The ADX (14) in Figure 2 is shaky near 15 levels with equal buying and selling pressure, indicating the possibility of consolidation near the new high. The RSI (14) has formed a series of lower highs in an overbought zone. There are mixed indications from the oscillators in Figure 2, and therefore, $COMPQ is likely to move sideways near the new high.

The bearish breakout of the ascending channel would not get converted into a serious correction. The robust support of 2800 levels and the two moving averages would be the lifeline for all the traders with long positions in $COMPQ.




Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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