MAILBAG QUESTION:

"the Nasdaq now has been coming on strong and has gotten above your 4000 target. whats a next target you think and any resistance?"

MY RESPONSE:

Yeah, the Nasdaq Composite (COMP) this past week came on like gangbusters as the S&P slowed down, pointing to the 'rotational' nature of corrections in this super strong bull market we're in. (Now that small investors are buying in, it's 'officially' a bull market I suppose; OR, maybe nearer a correction!)

Unlike a situation where we could point to a prior high as possible resistance such as when the Dow got to the 14000 area, equaling the prior high monthly Close of October 2007, in COMP we can go back to the February 2000 Close at 4696, but that prior all-time high isn't of much help in gauging any NEAR resistance with today's monthly Close at 4059.

There's a couple of techniques I use to measure possible technical resistance in the absence of any prior peak that's at all close by:

1.) Assuming there's a dominate up trendline (one low or series of lows may cut through such a line), an upper price channel is constructed by drawing a line parallel to the up trendline that touches the highest prior high or a line of prior such highs.

Such an upper channel line(s) is seen next with the weekly COMP chart below. There are two upper channel lines I've been working with as the lower line connected to or touched the MOST number of prior highs and the higher line touched the highest prior high. Potential resistance implied by the upper end of COMP's broad uptrend channel is suggested in the 4082 area next.

However, in a strong runaway type bull move, prices do break out ABOVE the upper end of a price channel. Much if not most of the time, channel lines suggest areas where an advance will at least slow down. Exceptions of course occur, such as in monster bull moves. You can look at how 'overbought' this market is, as suggested by the Relative Strength Index (RSI) seen below, but so what! These are just indicators that can point out areas to expect a trend reversal, but in LESS powerful trends.

2.) Another way to measure potential resistance or to suggest a different type of 'overbought' situation is seen with the moving average envelope study or indicator. What has 'worked' quite well in past market cycles for the major indices (not in individual stocks) is to compute where prices would be 4-5 percent above or below a 'centered' 21-day moving average on a daily chart basis. In my next chart, of the daily COMP I've highlighted two moving average envelopes that 'float' 4% above and 4% below COMP's 21-day moving average.

The current upper moving average envelope line would suggest the Composite is not extremely 'extended', relative to the 21-day average (and relative to past periods), unless COMP had reached the 4129 area this past week.

Looking at a weekly chart uptrend channel line for the big cap Nasdaq 100 (NDX) highlighted below, there's implied 'resistance' if NDX gets to the 3532 area in the coming week.

However, in such a strong bull market as this one, the Nas 100 might just sail through the upper end of its uptrend channel seen below, even though the 13-week RSI would suggest that NDX is already at an overbought extreme with a 'usual' lower probability of a new up leg. Again, I'll next go back to the NDX daily chart and use the 4% moving average envelope lines to also gauge where the Nasdaq 100 might hit potential 'resistance' and be as far extended (on the upside) as would typically be the case for this Index in past market cycles.

As was the case in the broad Nasdaq Composite seen first, the upper 4% (moving average) envelope line, as was the case back in May (2013) and in mid-July, suggests that NDX around 3547 would be about as far above the 21-day moving average as it typically gets; without either (at least) a slowing advance OR a sideways to lower correction. You can also see on the chart the point in June where NDX's intraday low (at 2825) got to a level 4% under the 21-day average which marked a major bottom. The 13-day RSI also got to a 'fully' oversold condition in that time frame. In an instance like this double occurrence, it was an excellent and 'low-risk' point to buy NDX calls (with both hands and feet!).


GOOD TRADING SUCCESS!