Charting the Key Levels in the Nasdaq
Perhaps no other market era has confused so many traders, novice and veteran alike, as the one that started four years ago, in March 2009, during the scariest point of the Great Recession and Global Financial Crisis. Since then, most global stock indices have continued to march far higher, defying all predictions of an impeding bear market, so far.
There are numerous reasons why stocks have continued to rise in the face of daily news that would seemingly indicate that the very opposite should occur. The Federal Reserve's unprecedentedly stimulative monetary policies, from ZIRP (Zero Interest Rate Policy) to QE (Quantitative Easing, where trillions of Dollars of liquidity have been pumped into the financial system to boost growth), have certainly played a large role, and some commentators even believe that the Fed is creating dangerous new economic and financial bubbles. One thing is for certain: the stock market action of the past four years has certainly showed how truthful the old traders' adage "Don't Fight The Fed" really is.
The point of this blog post isn't to perform a detailed economic analysis, but to show how the economic backdrop of the past four years has affected stock prices and to highlight important price levels and chart patterns that traders should be aware of. This blog post will focus on analyzing the tech-heavy Nasdaq 100 index because there are numerous identifiable chart patterns and trendlines that aren't as distinct in other stock indices.
This first chart goes back to the start of the current bull market in March 2009 and shows how the uptrend's price action occurred within a rising channel (Click here to learn more about price channels). The uptrend is likely to stay intact as long as price action remains within the channel. A break below the channel's rising support line (the channel's lower line) would be a strong indication that the long-established uptrend is shifting gears, and very likely, ending, which may lead to the next bear market. Notice that the trading action of the past year may be tracing out a bearish "head and shoulders" pattern, which will be discussed in more detail in the next chart.
This next chart covers the Nasdaq 100's price action of the past two years and shows that a bearish "head and shoulders" (click here to learn more about this pattern) may be forming, but remains unconfirmed until the Nasdaq 100 breaks below the "neckline" support level that's drawn on the chart. If a break below the neckline level occurs, and is accompanied by a break below the lower trendline of the four-year old rising channel that we showed in the first chart, the chances of a bear market occurring are quite high. Another fact that supports the Nasdaq's bearish "head and shoulders" pattern hypothesis is the divergence between the 21-day Rate of Change indicator (a momentum indicator) and price action during formation of the possible "head and shoulders" pattern.
In a strong market, the Rate of Change indicator rises to new highs when the market does, but, in weak markets, the Rate of Change indicator will trend down, even as the market itself is making new highs. Bearish divergences, like this one, are very common during market tops that occur before bear markets.
If the Nasdaq 100 rises above September 2012's high, then the potential "head and shoulders" pattern would be invalidated. This is how chart patterns like these work: technical analysts don't know which way a market will ultimately break out ahead of time, but they can at least lay out likely scenarios that the market will take and react to its moves accordingly.
In this next chart, we focus on the Nasdaq 100's most recent price action, a meandering uptrend that started just after the post-Presidential Election mini-correction. Notice that this uptrend's price action has occurred within a rising channel, similar to the channel that the past four years' bull market has occurred within. A break below the channel's lower support level would be a strong indication that the recent uptrend has ended and may result in a correction down to at least the neckline support level that was discussed in the prior chart.
This concludes our analysis of the Nasdaq 100's important chart levels, but please realize that nothing within this post should be taken as investment advice or a recommendation to buy or sell any investment, as it is for educational purposes only.
Stay tuned for our future analyses of other exciting financial markets!