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Nasdaq Forms Large Distribution

05/05/04 09:15:12 AM
by Arthur Hill

After a strong finish in March, the Nasdaq Composite fell apart in April and a large reversal pattern is taking shape.

Security:   Nasdaq Composite
Position:   N/A

Since reaching a high at 1914 in September, the Nasdaq Composite has gone nowhere and a large head and shoulders reversal pattern has formed. These are large distribution patterns that are confirmed as bearish with a neckline support break. The left shoulder formed in October and November, the head with the peak in January and the right shoulder in April.

Graphic provided by: MetaStock.
Volume is a key component of the head and shoulders pattern. Upside volume was high in January (green arrow) and then began to tail off. The black volume bars denote down days and the gray bars denote up days. A simple visual inspection shows that volume on down days has been generally higher than volume on up days over the last two months (red arrows). This is also reflected by the new low in on balance volume (OBV) over the last few days (blue arrow). These volume trends reflect increased selling pressure and distribution within the head and shoulders pattern.

It ain't confirmed until it's confirmed. That may sound obvious and simplistic, but the trend has yet to change until confirmation. No matter what the indicators say or pattern insinuates, confirmation with a break below key (neckline) support is required. Neckline support resides around 1900 and a break below this level would be the final straw. Upon a support break at 1900, the downside projection would be to around 1650 (2150 - 1900 = 250, 1900 - 250 = 1650).

Arthur Hill

Arthur Hill is currently editor of, 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 and the main contributor to the ChartSchool.

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