Nasdaq Composite 5/15/2014
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Most Trendy Stock Chart members are aware that I have been focusing on the Nasdaq when trying to gauge the overall health of this market. There are 2 main reasons for this.
- I do not believe the other indices are going to notch all-time highs while the Nasdaq does not.
- During periods of tighter capital requirements, technology stocks tend to lead the advance; this is usually because of the low debt that most technology firms carry on their balance sheets meaning they are less affected by tight credit policies or rising interest rates (which I anticipate will be coming later this year).
In order for the Nasdaq to notch new highs, I had mentioned in previous updates that a correction/consolidation was needed. A correction/consolidation can be very gut wrenching, as this one has been at times. But the main purpose of a gut-wrenching consolidation is to shake out the weak hands and get rid of the "sellers". It is difficult for any stock or index for that matter to notch new highs when there is a lot of selling going on. So if you remove the sellers through a tough corrective process, it allows for an "easier" price advancement afterwards.
But before we take a look at the Nasdaq, I do also like to chick in on the P&F chart for the NYSE Bullish % Index and see what that is telling us. For those new members, a reading above 70 is considered bullish.
The above chart indicates a bearish sentiment still for the overall market with a reading of 66.32 - not a horrible reading but also not bullish.
Let's flip back to some charts now for the Nasdaq Composite. Click to enlarge this next 1 year chart for the Nasdaq in order to read some of the notes I made on the chart.
Note 2 on the above chart is where I mention the decreasing volume that last 2 days as the Nasdaq is trying to hold above a gap-up from Monday morning. However, since the completion of Wave 5, there have been 2 other similar gap-ups that did not hold. Will this time be different? Well, one item that seems "positive" is note 1 that I made on the above chart.
This next 6 month daily candlestick chart also shows the higher low made recently by the Nasdaq, as well as a higher high. I had to use the above chart as most Trendy members know that Think or Swim (the charting platform that I currently use) no longer provides volume data for the index as a whole.
But in order for me to turn bullish again on the Nasdaq I will need to see the index make another higher low during this current 2 day downtrend and then make a higher high after this current downtrend stops.
If the Nasdaq breaks below 4014.17 mark on an intra-day basis in the next few days, my fears of a longer downtrend for the Nasdaq that I have eluded to in previous updates would seem to be confirmed. From an Elliott Wave perspective, a longer downtrend would most likely be the formation of a Zig-Zag Wave Pattern, as indicated in this Nasdaq update. From a chart pattern perspective, a longer downtrend would most likely mean a break of the neckline in the Head & Shoulders Chart Pattern I see in this next 6 month daily candlestick chart.
Referencing my Encyclopedia of Chart Patterns, it indicates that after the neckline is broken, most Head & Shoulder Chart Patterns take approximately 2-3 more months to fully complete. That would put the completion date for the Nasdaq's downtrend around the middle or end of July.
A standard way to estimate the length of the continued downtrend after breaking the neckline is to calculate the distance between the peak of the head and the neckline. For the above chart, that calculates to approximately 400 points. This is usually considered the minimum decline. So a break below the neckline on the above chart would indicate that the Nasdaq would be headed towards the 3550 area. This next chart, a high/low P&F Chart for the Nasdaq, also shows a target in the same area, 3500.
The closing P&F Chart is neutral as it reflects its bullish price target has been met and offers no additional guidance.
For those not familiar with P&F Charts, the High/Low P&F Chart is based on intra-day price activity while the Closing P&F Chart is based on end of day closing prices only.
The volatility and erratic volume have made the analysis on the Nasdaq a little tougher over the last several weeks, almost like a target that is constantly moving. But in summary, I think it is critical for the Nasdaq to make a higher low and then a higher high as I indicated above, that would indicate the Nasdaq could be forming a Flat Wave Pattern rather than a Zig-Zag Wave Pattern.
If the index cannot make a higher low and subsequently a higher high, then I fear we still have a couple more months of declining prices for the Nasdaq, which will also set the tone for most stocks that the index is comprised of. The bearish outlook would be confirmed with a break of the neckline in the Head & Shoulders chart. If the Nasdaq even reaches the neckline one more time, I will most likely be selling most stocks and sitting back for the next month or two, only holding onto one or two core positions while mostly trading stocks for quick flips until I feel the correction has played out. I may even throw a couple of shorts into the mix if I feel daring enough.