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NASDAQ Composite: Target At 12,950, But Watch Out For Surprises

Published 22/07/2022, 15:49
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  • The NASDAQ composite is showing signs of a trend reversal with an ascending triangle figure
  • Index components show bullish divergences on indicators and prices
  • Investors should keep in mind that bounces (even major ones) are a completely normal phenomenon in bearish trends
  • The recent price rebound in the NASDAQ Composite indicates that the bear market trend seen for the first seven months of the year could be on the verge of a major reversal.

    In the image below, we can see how higher lows with flat highs went right into forming a classic ascending triangle figure. This setup is typically a bullish trend continuation pattern, but it can be a reversal figure when found in a broader bearish trend.NASDAQ Composite Daily Chart

    In particular, on the daily chart, the confirmation of this figure came with the break of $11,690 area highs (second-last green candle).

    To project a possible target (according to academic theory), we replicate the distance from the lowest low (about 10,575) to the first short-term high (about 11,690) as the distance from a possible target point in the short term (taking us to about 12,950 points).

    The next test for this figure should be at the previous short-term high of $12,230. Therefore, traders must remain on their toes as today and next week will likely give us more clues about this movement.

    What's Next: Reversal Or Continuation Of The Descent?

    As always in technical analysis, we have to follow a trend, not anticipate it. Here, we might consider two factors (one for reversal and one for descent):

    Regarding the possible trend reversal, I point out how (see photo below) the NASDAQ 100 reached a record number of sessions (68) below the 50DMA. Usually, when there are such long records, it is a signal of possible market bottoms.

    NASDAQ 100 Consecutive Closes Below 50-DMA

    Source: thedailyshot

    In fact, many Big Tech stocks (see PayPal Holdings (NASDAQ:PYPL) pictured, for example) also show a bullish divergence between prices and indicators, reinforcing the case for a broad-based rebound, at least in the short term. PayPal Weekly Chart

    The bear market case, on the other hand--as in the chart below--argues that bounces (even major ones) in bearish trends are a completely normal phenomenon.NASDAQ Composite Weekly Chart

    In fact, I have included in the picture above the rebounds (yellow box) in the bear market period of the dotcom bubble. Despite bounces of even more than 50%, we can see how the market eventually collapsed anyway in the long run.

    So as always, having a diversified strategy with cash management, fractional entries, diversification, and a correct time horizon is the best option.

    Time will tell if we are right, but the charts to date look well set.

    Disclosure: The author is currently long on the NASDAQ 100.

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