What comes first — the D-Ram or the flat panel screen? The Nasdaq and the TAIEX (Taiwan Index) give the answer to the question.
Throughout the market collapse the Nasdaq has provided leadership for U.S. markets in terms of behavior. It was the first of the U.S. indexes to collapse and it is the first to show evidence of sustainable recovery. The degree of the fall is not the same as the S&P or the DOW. And it's the behavior of the market that's interesting. The performance of its tech-heavy components have a direct link to markets such as Taiwan. However these two markets show very different chart patterns.
The Nasdaq is dominated by the down sloping triangle pattern. The lower edge of the triangle is near 1,370. Unlike the same pattern on the Dow, this is not a well defined support level. The down-sloping trend line starting from the November 2008 highs is well defined. The down-sloping triangle pattern on the Nasdaq is more of a general condition rather than an exact pattern and this has some significant consequences for analysis.
First, it means the break below the support level had a lower probability of reaching downside projection targets. The shallow dip to 1,250 and rebound was not unexpected. Second, the trend line has greater significance. The breakout on March 23 above the trend line is a strong signal for a change in trend direction. There is less bearish pressure in the Nasdaq than in the Dow or the S&P.
The Nasdaq shows the classic patterns of trend reversal using Guppy Multiple Moving Averages (GMMA) analysis. The November 2008 rally at point A touches the lower edge of the long term GMMA and reacts away from it. The second really point B moves to the upper edge of the long term GMMA. The third rally at point C penetrates higher above the upper edge of the long term GMMA. Additionally the long term GMMA compresses showing that some investors are becoming buyers. The most recent rally has four features which support trend change. They are:
- The index moves above the long term GMMA
- The short term GMMA moves above the long term GMMA for the first time in 17 months.
- The long term GMMA compresses and turns upwards showing that investors have become buyers.
- The index moves above the downtrend line and in the retreat uses the trend line as a support level for as rebound.
The most bullish feature of the Nasdaq chart is the location of the nearest resistance level at 1,850. This is well above the breakout level at 1,500 and suggests the market can quickly rise to this level before developing some consolidation. In contrast the Dow and the S&P have nearby resistance levels that provide barriers to the uptrend.
The tech-heavy Nasdaq has a symbiotic relationship with its Asian suppliers and, not surprisingly, the anticipation of the Nasdaq breakout is reflected in the Taiwan Index (TAIEX) This market has a stronger foundation for the trend breakout. Starting October 2008 the TAIEX developed a broad flat consolidation period. The base of this pattern is near 4,150. The upper level is near 4,800. The breakout from this pattern occurred ten days before the Nasdaq breakout. These long-term consolidation patterns provide the base for sustainable trend development.
The width of the pattern is used to establish multiple upside targets. The first target of 5,400 has been achieved. The second target is near 6,000. The third target is near 6,600. GMMA analysis shows increasingly successful rally tests of the long term, GMMA followed by a breakout and move above the long term GMMA. The separation in the long term GMMA shows continued investor buying confidence in the new uptrend.
Amongst other features, a Nasdaq recovery rests on D-RAM and other components manufactured by Taiwan and other countries. These twin breakout patterns confirm the greater sustainability of the Nasdaq and TAIEX up trends.
What comes first — the D-Ram or the flat panel screen? The index charts suggests the TAIEX supplier moves before the Nasdaq manufacturer.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.