New article from Vince Heaney at FTmarketwatch. He's feeling optimistic now - not sure whether thats good or bad !!!(prev contrarian posts on the press and market direction!)
Just tried to post the link, but keep getting an error. So the article is cut and pasted - as I have credited it to him, and FTMarketwatch.com, I hope it is not breach of copyright!!
LONDON (FTMW) - Okay I admit it, I was looking for a Nasdaq pullback.
Previous commentary after the Fed rate cut last week highlighted the lack of initial follow-through by the Nasdaq [US:COMP] to the positive fundamental news, suggesting that the good news was all priced in.
The chart picture showed a market that had been in a range for four weeks and, despite several attempts, had failed to break decisively above the 2,200 level.
A range trading market will often test both sides of the range before breaking out in one direction or the other.
Having failed to break higher, the market moved lower to test supports. Previous commentary highlighted that moving average support had stemmed the decline. The 10 and 20-day moving averages had been broken, but while the Nasdaq had traded below the 30-day average, it had not closed below it.
At that point I was in favour of the supports giving way and the breakout occurring in a downward direction, especially when the lacklustre response to the Fed rate cut was taken into consideration.
Wait for the signal
The trading principle that has since been firmly illustrated is to always wait for the signal.
Go to the interactive chart for the Nasdaq with 10, 20 and 30-day moving averages, relative strength indicator (RSI) and slow stochastics added. The chart has been expanded to show the last three months' price action for clarity.
Last Wednesday the market opened below the 30-day moving average, on the back of disappointment with the Fed rate cut.
However, disappointment was short-lived with the market turning higher and closing Wednesday's session back above all three moving averages.
The RSI, that had been threatening to break back below the 50 level, rebounded and moved higher. The slow stochastics that had moved into oversold territory, below 20, turned, crossed over, and moved higher.
There was no bearish signal. The market did not close below the 30-day average. The Nasdaq now looked as if the supports had held at the bottom end of the range, but was still range bound. As noted above, range trading markets will often cross the range several times before a decisive breakout is seen.
One side to the other
Having been unable to breach downside supports, the market moved higher to test the top end of that range once more. Monday saw the Nasdaq finally take out the top of the consolidation range.
The market reached the previous high of 2,232, set on May 2, in early trade on Monday and powered through the resistance to finish 106 points, or 4.85 percent higher on the day at 2,305.
A breakout always looks more compelling, when the move is large and closes the day up on its highs. However, this year has seen many false dawns and investors are understandably cautious.
Market playing by the rules
What can really be said about the chart picture at this point? The main observation to make is that the market has done absolutely nothing wrong since the year's lows were posted on April 4.
The market rallied more that 35 percent from the 1,619.58 lows, unfolding in a five-wave sequence reaching 2,202.86 by April 20. Given the sharp nature of the rally the market entered into a protracted correction/consolidation of that advance, which lasted for a month until the May 21 breakout.
From the chart you can see that the correction unfolded in a three-wave pattern between April 20 and May 16. The rise since last Wednesday can be interpreted as the first wave of the next upmove. From an Elliott Wave perspective a five-wave advance that is then corrected by a three-wave pattern is exactly what is to be expected.
The pullback from the April 20 highs was only corrected by 35 percent - short of the first Fibonacci retracement of 38.2 percent. It was partly this fact that led me to look for the third leg of the correction to move deeper. But in the event the moving averages were sufficient to stem the correction and are currently providing a good guide to the Nasdaq's direction.
Where to next?
Elliott Wave counts are notoriously open to alternative interpretations, so let's keep it simple. The market has rallied 35 percent, corrected a little over a third of that move and has now broken higher after holding above its moving average supports.
If the breakout does prove durable it is not unreasonable to expect a further upmove of similar size to April's rally. This would give a market objective above 2,600 on the Nasdaq.
The move will not unfold all in one go, and you should note that the slow stochastics are showing a near-term overbought situation (indicator above 80). But while the market remains above its moving averages any short-term dip is a buying opportunity.
Mark
