The Trend Channel Everyone Is Watching
We can complicate this if we want to. Or we can keep things simple. Long-time readers know that I generally prefer the latter. Sometimes, it's the simplicity in the analysis that makes it the most special. A good example of this is the recent uproar from the twitterati about the uptrend channel in the Nasdaq Composite. We seem to be slipping below major trendline support which could be disastrous for this tech-heavy index.
A few weeks ago I wrote about some momentum divergences and broken support levels that set up an easy short entry for the nasdaq. It wasn't anything complicated, but it did present a favorable risk/reward scenario, which is all I really care about. So far this is working out nicely. But today I want to focus on the uptrend channel that we've been hearing everybody talking about lately.
Here is a daily bar chart of the Nasdaq Composite. What we do is more of an art than an exact science. So you can see that a drew multiple trend lines to mark support and resistance levels within the channel. I always like to draw an alternate trendline to account for whipsaws, although they typically connect similar points. This fairly clean trend channel goes back about 18 months:
You can see how we're now breaking below this channel for this first time. Remember, just because a trend line is broken doesn't necessarily mean that the trend has reversed, only that it's changed. A sideways trend can certainly emerge. So we have to keep that possible scenario in the back of our minds as well. In fact, based on other factors it would not surprise me one bit if we entered into a frustrating sideways 300-400 point range. If this does occur, we could look at it in two ways: either a consolidation before the next leg higher, or a bigger top that could create much more of a problem down the road. Today it's too early to be able to make that call, although I'm definitely leaning towards a topping pattern here.
I continue to be in the "stay away from the stock market camp", as I've been in all year. And when I say that, I am referring to the indexes themselves, not individual stocks. I believe there are always some non-correlated names that can rally. In reference to the Nasdaq Composite, I do think this support break is a bad one. But for things to really get scary, we would need to see a close below 3960. This level marks support from December and early February. But even then, prices would still be above a rising 200 day moving average. So it's hard to think the market is just going to start crashing from here. We would need a bigger longer topping pattern for me to feel confident about making that kind of call (see SPX Q4 2007). Further sideways consolidation here could create that scenario, but we still have a few more months before we're there.
We should continue to watch the leaders in the nasdaq to see how they react to their 200 day moving averages. If Biotechs, for example, continue to crash, then we should expect the composite to follow. But if Biotechs can stabilize here at their 200 day's, it would call for that further consolidation scenario mentioned above.
I wish I had more conviction with regards to downside targets in the Nasdaq, but it's just not there. You can't force it. That's why I'd just rather be in other markets. Commodities and bonds are the big winners so far this year. So I'll continue to focus my attention in that direction. But I wanted to weigh in on this uptrend channel that has the twitterati all excited.
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Tags: $COMPQ $QQQ $NDX