Outlook for the Nasdaq 100
About four weeks ago I wrote that the Nasdaq 100 was testing the seven-month bull trendline going back to November and the 55-day moving average. This is the chart that I posted on 15 June.
The index actually bounced almost perfectly off that trendline on the same day and in fact recovered much of the losses. This gave bulls the confidence to push the index back up to 5852 over the next seven sessions. In the last week of June however, the index finally broke below the trendline.
As I wrote in this article: ‘The 55-day moving average at 5631 also coincides with Monday’s low. It’s obvious therefore that a break below here signals a continuation of this correction. This would target the 23.6% Fibonacci level of 5582 combined with the May low at 5550. It is entirely possible that this support level will trigger a bounce.’
By 5 July the index had hit a low for the correction so far at 5560. Indeed this level held perfectly as we suspected. After four quite volatile sessions, the Nasdaq managed a push higher yesterday, reaching a peak of 5711. Does this mean that the correction is over and bulls are back in full control?
It is entirely possible that is the case, as the break of the seven-month trendline support has not done any serious damage to the longer-term eight-year bull trend. Holding the 23.6% Fibonacci support level, which incidentally was just a little above the blue 100-day moving average, does signal that bulls have the upper hand.
You will notice at the bottom of the chart how we became oversold on the stochastic just as we re-tested that important support area. This gave extra confidence to bulls looking for a new entry point to add to or establish new longs.
It’s unlikely to be plain sailing for the bulls, however, as they face a couple of important obstacles. Firstly, the 55-day moving average did a great job of support at the end of December, middle of April and beginning of June.
It’s fair to say this support has been a significant factor in maintaining the trend. Having broken this moving average at the end of June we are bouncing back to re-test it now, as a resistance area at around 5720.
As you can see in the chart above, we have held this moving average perfectly as I write. We are now overbought in the short term. If this is the beginning of a developing short-term negative trend, there is a strong chance the market will turn lower from here.
If we do continue higher we will have to tackle the eight-month rising trendline at 5790/5800. More importantly, if either of these two significant resistance levels hold the recovery, we have a potential head-and-shoulders top pattern.
The negative pattern will be confirmed on a break below the neckline at 5570/5560. This would act as a medium-term sell signal. The measured target is as much as 335 points lower. This would take us nicely down towards the 200-day moving average and 13-month bull trendline.
Both lines currently reside at 5245/5240 but are rising very gradually. Therefore this support level could be closer to 5300 by the time we reach it.
July should therefore be quite an interesting month. A break back above 5800, however, allows bulls to re-test the all-time high at 5898.75. This also coincides with the five-and-a-half-year rising trendline. You can see this in the weekly chart below.
If bulls decide to hit the exit button at this important resistance area we will have a negative double top pattern. This could still trigger a correction towards that 5300/5250 support area. Clearly those bulls have some interesting challenges ahead in order to maintain the longer-term trend.
Technical Analyst & Trader
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