The NASDAQ 100's Head & Shoulders

By: Robert McHugh | Sun, Aug 21, 2005
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The NASDAQ 100's chart below shows that prices fell as expected from the Head & Shoulders top formation. The drop was substantially below the neckline, below 1,590, completing and confirming the pattern, which means we now have a high probability that the NDX will decline to the minimum downside target of 1,550. This is arrived at by measuring the distance from the neckline to the head, and subtracting that from the neckline. From Wednesday through Friday, the NDX attempted to climb back above the neckline, but this effort failed - which is Bearish.

But this presents a compounded problem. The probability is high that the NDX is headed for 1,550 soon, however worse, 1,550 is the bottom boundary of the rising trend-channel since the April 29th low. Should the decline bust below 1,550, we are facing weakening support. All that would be left is the 200 day moving average at 1,532, then it is gang way below.

The Elliott Wave count for the NASDAQ 100 on the next chart shows that the wave 2 Minor degree top, a correction of the wave 1 decline from December 15th, 2004's 1,635.70 Primary degree wave (2) top, occurred on August 2nd, and the price action since then has been a Submicro degree wave {1} down, and {2} up. Wednesday August 10th's reversal marked the start of wave {3} down, and since then we've seen the first two waves of lesser degree.

1,550 is also an important target per the EW count, a possible target for {3}, as wave {3} would be 1.618 the length of wave {1} down at that level, although the first level of support is sooner, at the neckline of the Inverse Head & Shoulders pattern, around 1,570ish, and then the 50 Day Moving average, around 1,560ish. It is looking more and more likely that the Bullish Inverse H&S pattern is going to fail. Had this pattern cropped up at the end of a decline, it would have more reliability, however instead of occurring at a bottom, it is coming after a long run-up in prices.

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Here's the first of our two NASDAQ 100 trend-finder indicators as of August 19th, 2005, both remaining on "sell" signals Friday night. For the first one, the NDX 14 Day Stochastic Fast measure comes in at 34.00, the Slow at 33.00. Although the Fast is a hair above the Slow, it must rise decisively above it to generate a "buy," which it has not yet done. Correlation of these signals with price movement has been good, as indicated by the thick yellow directional arrows.

The second indicator, the NDX Purchasing Power Indicator™, comes in Friday evening at 63.53, and would need to rise 6 points to 69.53 to generate a "buy." Again, excellent correlation with price movements as pointed out by the thick yellow arrows. Thus with both key indicators signaling "sell," the odds are high that further decline is coming over the next several days and perhaps weeks. Since the Stochastic generated a sell on July 21st, 2005, the NDX fell 29 points, and is down 1.8 percent. Same is true for the PPI. Since it generated a confirming "sell" on August 5th, the NASDAQ 100 has fallen 29 points, or 1.8 percent.

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Since 1999, this has not been a buy and hold stock market, not with the S&P 500 still down 21 percent, the Dow Industrials still down 10 percent, and the NASDAQ Composite still down 58 percent, and the NASDAQ 100 down an exact 67 percent -- over the past six years. No, it is a timing stock market, a trader's market, and that looks to be our future. In this stock market environment, to make money, good buy/sell signals are critical.

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"And as Jesus was about to go up to Jerusalem,
He took the twelve disciples aside by themselves, and on the way
He said to them, "Behold, we are going up to Jerusalem;
and the Son of Man will be delivered to the chief priests and scribes,
and they will condemn Him to death.
and will deliver Him to the Gentiles to mock and scourge and crucify Him
and on the third day He will be raised up."

Matthew 20: 17-19

"And though they found no ground for putting Him to death,
they asked Pilate that He be executed.
"And when they had carried out all that was written concerning Him,
they took Him down from the cross and laid Him in a tomb.
But God raised Him from the dead;
And for many days He appeared to those who came up with Him
from Galilee to Jerusalem, the very ones who are now
His witnesses to the people."

Acts 13: 28-31


 

Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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