Chart: Here's why the Nasdaq will pass 5,200

After a retreat of around 12 percent, the Nasdaq has rebounded strongly from the long-term uptrend support line and is moving to retest the upside target near 5,200 points.

This is the second time the Nasdaq has moved towards the 5200 technical target and many investors are worried that these new highs signal the end of the uptrend. This is where chart analysis is invaluable.

Chart analysis gives investors a method to decide if the rally towards 5,200 is a buying opportunity or a sell signal.

In 2000, the rise of 247 percent from 1,475 to 5,132 over seven months was unsustainable. The Nasdaq trend was almost vertical from November 1999 until the crash in March 2000.

This time, the index's behavior is different.

The current Nasdaq movement is a steady uptrend moving in a well-defined trading channel that is best seen on a monthly chart. The up-move started in March 2009 and has moved steadily upwards in a sustained six-year uptrend kept within the confines of a upwards-sloping trading channel, or rising trend channel.

The lower edge of the trend channel is shown by trend line A. The upper edge of the channel is shown by trend line B. In November 2013 the Nasdaq moved above the value of trend line B and now uses this trend line as a support level. Support was successfully tested in August, September and October.

A second trend channel can be calculated using the width of the channel between lines A and B. The upper edge of the new trend channel is shown with line C, which acts as a resistance level for the rising trend.

The Nasdaq trend moves up in a series of horizontal trading bands. The width of the trading band is measured and this value is projected upwards to give the new upside trading target. Using this method, the breakout above 4,640 has an upside target near 5,200. A move above 5,200 has a target near 5,800, and the 5,800 target is the long-term target for 2016.

There are three significant patterns that indicate a major trend change. The first of these patterns is the head and shoulder pattern. The second is the rounding top pattern. The third is a blow-off top pattern that follows a period of extreme upwards momentum.

None of these three trend reversal patterns currently appear on the Nasdaq chart, which indicates there is a low probability of a change in the trend direction. The rally towards 5,200 is a buying opportunity for a trend continuation towards 5,800.