What a rise the NASDAQ has had and what great potential it has to fall. Best seen on the monthly chart, there are three chart analysis features.
The first feature is the index's spectacular rise. The monthly NASDAQ seems immune to the troubles that afflict the Dow Jones Industrial Average and the S&P 500. This is a solid uptrend that has accelerated since March 2013, with the index moving confidently towards the 4100 target level.
The weekly chart of the NASDAQ with a Guppy Multiple Moving Average indicator shows the long-term group of moving averages is widely separated. The separation between the long-term group of averages and the short-term group of averages remains steady and consistent; these are the features of a strong sustainable trend.
The second feature is the NASDAQ's potential upside targets. These are calculated by taking the width of the trading band and projecting it upwards. The first upside target after the breakout above 3150 is calculated through this method.
Between 2010 and 2011 the NASDAQ moved in a narrow trading band with the lower edge near 2300 and the upper edge near 2900. The first target for the NASDAQ breakout is calculated by projecting the width of the trading band upwards and gives a target near 3500. This has been achieved.
This trading band projection method can be applied again to set a second target near 4100. Applying the same trading band projection method, a sustained breakout above 4100 has a third target near 4620. However there is a high probability the market will consolidate near 4100.
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The third feature is the position of the long-term uptrend line. This line defines the extent of any fall in the NASDAQ that is consistent with a continuation of the uptrend. The current value is near 3300.
The NASDAQ could fall to near 3300 and still remain in a long-term uptrend. From the current high near 3914 this would represent a 15% fall. While this would be a major market correction, a fall to near 3300 remains consistent with the long-term uptrend and would represent a buying opportunity for the brave hearted.
A fall below the long-term uptrend line would signal a change to a new downtrend with an initial downside target near 2900 and a longer-term downside target near 2300.
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The index's behavior around the next resistance level is critical. There is a high probability of a retreat followed by a rebound. This is simple trend trading. The steadily rising NASDAQ trend is defined with the up sloping trend line; it continues in a bullish environment with 4100 as the first upside target.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.