Since my last article on April 16, the tech-heavy Nasdaq Composite Index (COMPQ) moved substantially lower, dropping below intermediate-term support of its 50-day moving average for two days, then started climbing back up. Now, the index is slightly higher than it was two weeks ago, but is in "no man's land." This means the Nasdaq is stuck between significant short-term support and resistance levels. First, take a look at the daily chart of the Nasdaq below:
The blue horizontal dashed line at the 3085 level represents near-term resistance, which was formed by the "swing high" of May 1. Furthermore, a bearish "inverted hammer" candlestick pattern also formed on May 1 because the market traded substantially higher during the trading day, but reversed in the afternoon to close near its intraday low. This pattern alone created substantial overhead supply because traders and investors who got trapped in the afternoon sell-off will be looking to sell into strength on any subsequent rally attempt in the coming days.
Below the current price of the Nasdaq lies two near-term support levels to monitor. The dashed horizontal line at the 3026 level is the approximate area of convergence of both the 20-day exponential moving average (beige line) and 50-day moving average (teal line). Generally, the 20-day exponential moving average is a widely followed indicator of near-term trend, while the 50-day moving average is commonly followed by institutions as an intermediate-term indicator of trend. When two key moving averages converge in the same general price point, the support becomes even more significant, which is why the 3026 area of support is important.
As long as the Nasdaq continues to trade in a tight sideways range and build a base above both its 20 and 50-day moving averages, it is a positive sign for the market. However, if the Nasdaq convincingly breaks below the 3026 level, it will likely fall very quickly to test key support of its prior "swing low."
The prior "swing low" is this third dashed horizontal line at the 2946 level. If the Nasdaq happens to fall back down to that area, we will be monitoring closely to determine whether or not the index holds that major level of support ( although an "undercut" of approximately 1 percent would not be surprising). If that pivotal level of support fails to hold on the Nasdaq's next move lower, it will represent the formation of a second "lower low." At that point, the odds would significantly increase of a subsequent "lower high" forming again, which would confirm the formation of an intermediate-term correction off the March 2012 highs. But until that happens, the Nasdaq is simply in a sideways trading range, which gives our market timing model a neutral to slightly bullish bias at present.
Now that you are up to speed on key near and intermediate-term support and resistance levels in the Nasdaq, consider setting price alerts on your trading platform so that you can be instantly notified when a key level is violated. Although we stick to our disciplined trading plan by following stop prices of individual stocks and ETFs, rather than making decisions based purely on broad market price action, it is important to realize our strategy is based on trend following. As such, our market timing model continually focuses on making sure we are on the "right" side of the market at all times."
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