NASDAQ COMPOSITE: MAJOR BULLISH BREAKOUT OR RISING WEDGE?
NASDAQ HITS FOUR-YEAR HIGH ... Chart 1 shows the Nasdaq Composite having hit a new four-year high this week. It's now trading at the highest level since the spring of 2001. There's another shelf of potential resistance to watch at 2328 (see circle), but the action has been impressive. That also continues the trend of higher lows and higher lows that started in the fourth quarter of 2002. Some of our readers have asked, however, about a price pattern that's been forming since the start of 2004 that's marked off by the two converging trendlines shown on the chart. Let's take a closer look at that pattern and try to interpret what it means.
Chart 1
IS THE NASDAQ FORMING A RISING WEDGE?... The weekly bars in Chart 2 give a closer look at the two converging trendlines. In technical work, the price pattern since early 2004 looks like an "ascending wedge". The pattern is characterized by two rising trendlines -- one drawn over the price peaks and another under the price troughs. What distinguishes the "wedge" from a "triangle" is that both lines are rising. [In a triangle, the upper line is either flat or falling]. While the triangle is a bullish pattern, the wedge isn't. The key line to watch right now is the upper line drawn over the last three peaks starting at the beginning of 2004. The Nasdaq is in the process of challenging that resistance line. A close below the lower line is necessary to turn the chart bearish. A decisive close over the upper line (which appears more likely) would negate the possibility of a wedge pattern and would be a bullish sign.
Chart 2
POTENTIAL UPSIDE TARGET FOR THE NASDAQ ... Assuming the Nasdaq is able to clear the upper resistance line shown in Chart 2, how high could it go. One way to tell is by using percentage retracements. Earlier in the week, I wrote that the Nasdaq has a tendency to respect Fibonacci retracement levels. In that case, I was writing about the possibility of a short-term pullback that would retrace three-eights of its recent price advance (which now appears less likely). In this case, I'm talking about a possible three-eighths retracement of the 2000-2002 bear market. That's based on the distance from the early 2000 peak over 5000 to the late 2002 bottom at 1192. The chart shows that a 38% retracement of that bear market would take the Nasdaq to the 2632 level. But it has to break through its two-year resistance line first. If it does, it will give a boost to the rest of the market which is breaking through resistance barriers of its own.
Chart 3
DOW AND S&P 500 ACHIEVE BULLISH BREAKOUTS ... The Dow Industrials broke through chart resistance along its summer highs to achieve a bullish breakout (Chart 4). The next upside target is the high reached during March near 11000. The S&P 500 did even better. The daily bars in Chart 4 show that Friday's close put the S&P 500 at a new 2005 high. The monthly bars in Chart 5 show the S&P now trading at the highest level in four years. That same chart also shows the next potential resistance barrier to be at 1315 (green circle) which was the peak hit in May 2001. This week's action makes it clear that the fourth quarter rally is gaining momentum. The market has chart momentum in its favor as well as a friendly seasonal trend which should last into January. After that, we'll have to take another look.
Chart 4
Chart 5
Chart 6
