The Nasdaq is due for a correction.
It has soared above the primary uptrend line and achieved the trade band target of 6,310. A correction is a high probability and trade band analysis is used to set the downside targets.
A correction, however, is not an end of the trend. Following the correction, there is a high probability the uptrend will resume a move towards a longer-term target of 6,820.
The monthly Nasdaq chart is used for strategic analysis and asset allocation.
The chart has two analysis features. The first feature is the long term uptrend trading channel (A). A trading channel is created by two parallel sloping trend lines. The lower trend line starts from the Nasdaq low in March 2009. The trend line placement is confirmed by successful rebound tests in 2011, and in 2,016 February. Trend line (B) starts in April, 2010. This trend line was broken on the upside in December, 2013. After then, the trend line acted as a support level. The Nasdaq clustered around the upper trend line until January, 2016. The Nasdaq dipped below the upper trend line for five months in 2016, but in July of that year the index moved above the upper trend line.
The Nasdaq has moved well above trend line B, so this is now a long-term support level. This is a very strong bullish trend signal, but it also opens the potential for a pullback and correction.
The second Nasdaq analysis feature is the construction of trading bands. Trading bands are horizontal support and resistance levels. The lowest trading band was created and confirmed between February, 2010 and February, 2012. The width of this trading band was projected upwards to give the first breakout target. When this was achieved, the width of the trading band was used to set the next upside target. This method has successfully set all the Nasdaq breakout targets since 2012, including the most recent 6,310 target level.
Using this analysis method, the most recent trading band target was 6,310. This level was reached in June this year. The width of the trading band is projected upwards and gives the next target near 6,820.
The monthly chart provides strategic analysis. The trading channel defines how the Nasdaq uptrend develops. Investors expect to see the index retreat clustering near the value of the most recent trading band support near 5,780. This confirms that when the index retreats it is a good buying opportunity for a continuation of the long-term uptrend.
The trade band analysis provides an answer to the question of how high the Nasdaq might rise. The analysis method sets a target near 6,310. In this type of market environment, we use the ANTSYSS trade method to extract good returns from the consolidation and breakout developments.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.