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NASDAQ Composite Pullback Watch

About 2 weeks ago in the Idea Chamber I mentioned that the NASDAQ Composite had met the minimum requirements for its Bullish Impulse wave pattern when the index hit 7,505.77 in late January.

Well, the index had a tough week after that post with an approximate 10% sell-off. The index did however have a nice reversal on Friday afternoon 2 weeks ago. This Friday brought about another mid-day type reversal. This mid-day reversal looked bearish though, not bullish like the previous week.

Let’s see what the pullback and subsequent rebound is indicating on the charts.

NASDAQ Composite – Downside Price Targets

I’ve previously commented on the pullback for the NASDAQ. I had mentioned that a flatter correction was most likely in the cards for the index rather than a steep pullback and the correction should probably be somewhere in the 10-15% range.

But now that there has been a pullback and subsequent rebound, a Fibonacci Extension Tool can be placed on the chart to calculate potential downside targets with any sort of continued market correction.

The previous downside target of approximate 6,200 I mentioned in the Idea Chamber was based solely on a previous consolidation area during the index’s uptrend. However there are now 3 anchor points available to place a Fibonacci Extension Tool on the chart. The[s2If !current_user_can(access_s2member_level1)]……

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I discuss in detail the price targets calculated by the Fibonacci Extension Tool on the above chart. I review what each of those price targets also represents for the long-term trend.

If you are not a Trendy Stock Charts member, consider joining today! There are several different subscription plans available.[/s2If][s2If current_user_can(access_s2member_level1)]61.8%, 100% and 161.8% Target Lines are the potential pullback areas.

The 61.8% Target Line provides for a successful re-test of the bottom that was set one week ago. If the bottom re-test fails, look for the 100% Target Line as the next target area. Reaching the 100% Target Line would involve developing a Zig-Zag wave pattern. Wave C of the Zig-Zag wave pattern would be very similar to Wave A. That would mean a painful sharp drop over a 1 weeks time. Does that mean next week could get nasty? It does.

Now the 161.8% Target Line is the potential target if a Bearish Impulse wave pattern develops to the downside. That would mean the fist pullback we saw 2 weeks ago was a Wave 1 to the downside. Last week was Wave 2’s rebound. That would mean an ugly Wave 3 would be developing next week. At first, it may be hard to distinguish if it is a Zig-Zag wave pattern or a Bearish Impulse wave pattern.

For the sake of the long-term uptrend, I hope we do not have to discuss a pullback to this area. But if the 6,400 price level does not hold, the 5,800 price level is right around the corner.

NASDAQ Composite – Bullish Scenario

Above, I laid out the couple of the bearish scenarios that seem to be unfolding. Now let’s see what could happen from a bullish scenario. The key to the bullish scenario is identified on the above chart with a price alert. I set a price alert at 7,023.62 so I can be notified with a text in case I’m not paying attention to the charts at the time.

If the index breaks below the 7,023.62 price level in the upcoming week, that would be an indicator that the correction is still in process. On a break below the 7,023.62 area, you would want to sell the next rebound. The next rebound should be towards the previous market highs. But that will be a sell the news event.

But if the index can stay above the 7,023.62 price level next week, the index could be in the process of still pushing higher before it enters into a short-term correction.

NASDAQ Composite – Triangle Wave Pattern

When there is a strong uptrend like we’ve had, the typical correction pattern is a Triangle wave pattern of some sort. If a Zig-Zag wave pattern does develop as I’ve mentioned above, that Zig-Zag wave pattern could be a completed Wave A in a Triangle wave pattern. Wave A in the Triangle wave patterns is always a Zig-Zag wave.

Here are a few different types of Triangle wave patterns. Notice that Sometimes Wave C breaks below Wave A, other times it does not. That is what helps to identify which type of Triangle wave pattern you are looking at.

NASDAQ Composite – Long-Term View

From a long-term perspective, I want to remain mostly bullish until the NASDAQ Composite reaches the black 161.8% Target Line. The black 161.8% Target Line on this 20 year monthly candlestick chart begins in 1994.

Maybe the index tops out at the 161.8% Target Line. Maybe there is a chance that the index continues its push upwards and towards the 261.8% Target Line. Those are not easy questions to answer right now and will have to be addressed as the index reaches the initial price area of 8,294.95.

NASDAQ Composite Summary

Be ready for any continued weakness early in the week. If by Wednesday the market starts to rebound, look to see if it broke below the 7,023.62 price level. If it did, the rebound is one to sell into. If it did not break below that area before rebounding, continue staying long as new market highs are probable at that point.

If the market sees weakness most of the week because a Zig-Zag wave pattern is developing, then the end of the week would be the buying opportunities for most stocks to get back long for the rebound back towards the market highs.

I will be out Tuesday at a client this upcoming week but otherwise will be around most of the week to answer any questions or help to provide some follow-up analysis during the week.

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