Nasdaq 100 completing a pattern

n May, we cautioned readers to be prepared for a downward turn in equity indices – a forecast that was in part supported by the development of wedge-like formations. However, U.S. indices have since broken upward out of those formations. We still believe upside potential is limited and a sizeable correction is due this season. Yet, we cannot count the top as being in. The Nasdaq 100 Index currently presents the clearest Elliott wave structure and it suggests that a small decline may be due in mid-June to be followed by an attempt to make yet another new high in late June or early July.

As shown on the monthly chart below, price has reached the target area we have been watching since early March. Not far above that area, the 3,862 price level provides additional resistance as the Fibonacci 76.4% retrace of the index’s all-time high. When the rally finally ends, NDX should at the minimum see a correction of wave (v), and it may see a larger correction of the entire move up from 2009.

2014-06-10 TOTM NDX image 1

The weekly chart shows how May’s strong upward price move fits well with the idea of an upward wave ‘iii’—a wave that would be expected to show strength. If price finds resistance near the mid-line of the channel on the weekly chart (approximately 3,817 this week), then a relatively small wave ‘iv’ could take it back down to test the lower channel boundary before another bounce.

2014-06-10 TOTM NDX image 2

The daily chart offers another view of the price rise of May and early June and it also is consistent with the idea of that move being wave ‘iii’. A standard 38.2% retrace would take price near the lower boundary of the Schiff channel before another rally takes price up in a (perhaps final) wave ‘v’.

2014-06-10 TOTM NDX image 3

Intraday traders and others working on relatively fast time frames may find it possible to trade both of the approaching waves ‘iv’ and ‘v’, although wave ‘iv’ may turn out to be choppy. Traders with a longer perspective may have to choose how to approach a downward trade based on their appetite for risk. The method of offering out near a defined resistance level is more risky, but it also lends itself to tight placement of stops above that level. More conservative traders will wait for confirmation of a developing downward trend which probably would consist of another breach of the lower boundary of the channel shown on the weekly chart below.

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