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As the Nasdaq falls a buying opportunity arises

Adam Jeffery | CNBC

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.

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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.

Using the same method, a sustained breakout above 4100 has a third target near 4620. This is the long-term target for a rebound after the current retreat.

The position of the long-term uptrend line A: This defines the extent of any large fall in the Nasdaq that remains consistent with a continuation of the uptrend. For instance, the Nasdaq could fall to near 3500 and still remain in a long-term uptrend trading channel. From the current high near 4370 this would be a 20 percent decline – a major market correction. It's similar to the 19 percent fall from 2920 to 2360 in July 2011 when the lower edge of trading channel trend-line A and the 2360 level acted as support. A future decline to the lower edge of the trading channel near 3500 on trend-line A remains consistent with the long-term uptrend.

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This is a temporary trend retreat and correction, not a trend change, thus investors will use the retreat as a buying opportunity. The U.S. tax year ends on April 30 so some of this sell-off is tax driven.

There is a high probability the retreat to inside the trading channel will be followed by a rebound. The Nasdaq trend is defined by the up-sloping trading channel with 4620 as the next 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.

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

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