Weekly Nasdaq 100 Candles

The action in the Nasdaq100 has been giving us clues as to what the rest of the equities market is going to do since this cyclical bull market in stocks began two and a half years ago. I think you can make a valid argument that the 2008 bear market ended in November as that was the lowest low that the Nasdaq100, or $QQQ, made during the decline. As the Dow Industrials and S&P500 were making new lows in February and March of 2009, $QQQ was already in the process of making higher lows and higher highs.

Since then the Nasdaq100 has been leading us higher with names like $AAPL and $AMZN among many others. So naturally during times like this where 3 people can look at the same chart and come up with 3 different conclusions, I think it’s best to look at the leader here. What is the Nasdaq telling us about the direction of the market going forward?

Well, one of the basic tenets of Technical Analysis, one of the first things that we learn when entering the world of charting is the laws of polarity. In other words, former Resistance eventually should become Support and former Support eventually should become Resistance. I say should, because there is a little more to it than that. But lets stick with this for now.

Look at the weekly candlestick chart of the Nasdaq 100. Polarity here is obvious everywhere. But what about now?

Resistance from November last year became support in March and June of this year. Classic polarity right? Until just recently those support levels were holding. Two Weeks ago, $QQQ broke down temporarily below these levels but closed out the week back above. After the S&P downgrade last week $QQQ finally broke down well below these support levels to test that former resistance from last April. The highs of the Spring in 2010 came into play this week as that resistance became key support and buyers showed up when they had to.

So now what? We sold off after breaking support only to rally and retest this key level which theoretically should become resistance. In fact, the Nasdaq100 closed the week at $53.57 which is the exact low achieved on March 16th (to the penny). So what should happen if this upcoming week the Nasdaq100 rallies breaking all sorts of laws of polarity? Did that support break ever really happen? What if we take out the candles and just look at closing prices? Was there even a support break? It’s arguments like these that add evidence to the statement we always make in that this is more of an art and not an exact science. Throw the books out the window guys, this is trading and the market takes no prisoners.

Here is the problem. If we do indeed take a Weekly closing chart of the Nasdaq100, we have a rarely seen broadening pattern of higher highs up top and lower lows down below. Although its hard to find one of these, the pattern is indeed negative.

It’s going to be a big week for the Nasdaq, and therefore equities as an asset class. The weekly charts clearly mean more than the daily’s so we’ll pay close attention to where we close out the weeks rather than all of the noise we have during the week. We shouldn’t ignore it, just adding more weight to the bigger picture. What do you guys think? I told you what the Nasdaq is telling me – what do you see?