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Rebound Rally Could Take Nasdaq to 4,100: Charts

Is the pullback on the Nasdaq an entry opportunity for a continuation of the uptrend, or is it an exit signal because the trend is about to fail?

Answering the question is where chart and technical analysis is essential. It's useful to approach this from two different time perspectives. The monthly chart gives a good analysis of the secular, or dominant, underlying trend. The weekly chart helps to develop the trading tactics.

The breakout above 2900 in 2012 February was the first move to make new six year highs. The general Nasdaq uptrend continued for most of 2012.

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When the Nasdaq moved above 2900 in 2012, it broke above the strongest resistance level on the Nasdaq index. In October of 1999, the Nasdaq paused briefly near the 2900 level and then it moved rapidly upwards to the peak high of 5132. This 71 percent rise was later called the internet or tech bubble.

From the high of 5132, the Nasdaq collapsed to below 2990 and took another two years to reach the turning point low of 1329 in 2002 at the bottom of the downtrend.

The monthly chart suggests the Nasdaq can fall back to the value of the uptrend line near 3050. This is the same value as the lower edge of the long term Guppy Multiple Moving Average on the weekly chart.

This creates the conditions for a rebound rally within the environment of the rising trend. This combination of weekly and monthly support features suggests that any retreat is most likely to be temporary. This is a buying opportunity for a continuation of the uptrend.

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The first upside target is calculated by using the trading band pattern width on the index. Between 2010 and 2011 the Nasdaq moved in a narrow trading band with the lower near 2300 and the upper edge near 2900.

The next upside target for the Nasdaq is calculated by projecting the width of the trading band upwards and gives a target near 3500. This trading band projection method can be applied again to set a new target above 3500

  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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