All the conditions for a reversal in the NASDAQ 100 appear to be in place, but just because these conditions are present doesn’t mean a reversal must occur. The most obvious condition is the presence of a rising wedge, which formed over the past month and broke on Friday. Whether this pattern entirely unfolds remains to be seen, but there is supporting evidence suggesting it may.
Momentum, as measured by the Relative Strength Index, has clearly been trending lower since peaking on May 19, even as the price of the NASDAQ 100 has continued to rise—a classic bearish divergence.
Over the same period, we’ve observed the NASDAQ rising on decreasing levels of volume—another characteristic of a rising wedge pattern. Then, on Friday, the index broke below the lower boundary of the wedge. The wedge measures approximately 7% from its bottom to the top, suggesting that if the pattern fully plays out, the NASDAQ could decline back to around 20,350. It is also worth noting that there is a gap on the chart at 20,150, which could potentially be filled during such a pullback.
However, that doesn’t mean a decline will be straightforward, because, for now at least, the NASDAQ has found support at the 20-day moving average at 21,514. The NASDAQ will therefore need to break through this strong support level for a deeper decline to occur. In fact, the NASDAQ has not traded below its 20-day moving average since April 23.
While all the conditions for a break from the NASDAQ’s rising wedge are present and appear on the verge of unfolding, the market still has much to prove before the bearish scenario can fully materialize.
Written by Michael J. Kramer, founder of Mott Capital Management.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
Momentum, as measured by the Relative Strength Index, has clearly been trending lower since peaking on May 19, even as the price of the NASDAQ 100 has continued to rise—a classic bearish divergence.
Over the same period, we’ve observed the NASDAQ rising on decreasing levels of volume—another characteristic of a rising wedge pattern. Then, on Friday, the index broke below the lower boundary of the wedge. The wedge measures approximately 7% from its bottom to the top, suggesting that if the pattern fully plays out, the NASDAQ could decline back to around 20,350. It is also worth noting that there is a gap on the chart at 20,150, which could potentially be filled during such a pullback.
However, that doesn’t mean a decline will be straightforward, because, for now at least, the NASDAQ has found support at the 20-day moving average at 21,514. The NASDAQ will therefore need to break through this strong support level for a deeper decline to occur. In fact, the NASDAQ has not traded below its 20-day moving average since April 23.
While all the conditions for a break from the NASDAQ’s rising wedge are present and appear on the verge of unfolding, the market still has much to prove before the bearish scenario can fully materialize.
Written by Michael J. Kramer, founder of Mott Capital Management.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.