The Nasdaq pullback that we forecasted in January has commenced. Following its stellar 38.3 percent rise in 2013 the Nasdaq has lost momentum as the Federal Reserve further tapers its asset-purchase program. Down 3.4 percent year to date, the index suffered its biggest single-day drop in two-and-a-half years last Thursday underscoring the pullback.
This raises one key question for investors: is this is a temporary retreat, or a significant change in the trend? A retreat would present a buying opportunity for a continuation of the uptrend, while a change in the direction of the trend would be a sell signal to protect profits.
The Nasdaq has a steady and strong up-sloping trading channel which is best seen on a monthly chart. The chart has three analysis features: a trading channel; potential upside targets; the position of long-term uptrend line A.
The trading channel: The lower edge of the trading channel is defined by trend-line A, while the upper edge is defined trend-line B. The Nasdaq's move above the upper edge of the trading channel and resistance near 4100 increased the probability of a Nasdaq retreat.
Potential upside targets: The Nasdaq's first upside target near 3520 is calculated by projecting the width of the sideways trading band upwards; this has been achieved. Applying this projection method again we find a second target near 4100, which has also been achieved.