The Final Line in the Sand Overhead for the NASDAQ

Oct 27, 2009: 2:18 PM CST

The NASDAQ Index has approached a defining line, which is likely to form the boundary between calling this market a “Bear Market Rally” and a “New Bull Market.”  What is that level, and how close are we now to it?  Let’s take a quick look at the NASDAQ Weekly Structure.

There are a few key points to watch, as noted above.

61.8% Fibonacci (of Whole Bear Market):  2,251

The ‘maximum expected’ retracement for a Bear Market rally often is accepted to be the 61.8% retracement – anything that retraces beyond that is often considered to be stronger than a normal or standard retracement, and many technicians use the 61.8% retracement as the “line in the sand” between a “retracement” and “impulse.”

Prior Price Support from 2008:  2,160

According to the “Price Polarity Principle,” it is accepted that “Old Support Becomes New Resistance,” which is why this is an important level to watch as a potential stopping point for the current rally.

This is more than just a major prior support zone.  A meaningful move above 2,160 or 2,200 would invalidate a leading Bearish Elliott Wave count.  Though not labeled, envision the March 2008 lows as the end of Wave 1 and the May 2008 highs near 2,500 as Wave 2.

Count the March 2009 lows as Wave 3 and then that places us squarely at the end of a powerful Wave 4 Rally with the expectation that a final Wave 5 Impulse Down is yet to come.

Let’s look back to one of the Basic Rules of Elliott Wave Theory:  “Wave 4 Cannot Enter the Price Territory of Wave 1.”  Some analysts allow a slight overlap, but if we go much beyond 2,200, it will be the turning point to reject officially this bearish count in favor of the more bullish count which would place the final (terminal) 5th wave at the March 2009 lows instead of the 3rd wave.

This ‘bullish’ count places the 4th wave at the January 2009 highs and the final 5th wave at the March 2009 lows.

See my May update on the S&P 500 Competing Wave Counts for how the structure plays out on the S&P 500 (neither interpretation has changed since then).

This count has been updated – but not changed – in the “August Elliott Wave Count” update.

200 Week SMA: 2,214

The 200 week simple moving average currently rests at 2,214.  While not as significant as the Fibonacci or “Polarity” resistance levels, it adds to the case that resistance is to be expected at 2,200… or if broken, then bears will have lost perhaps their final argument that this is a “retracement” in a bear market as opposed to a “new bull market.”  As long as price remains above the 200 week SMA, it becomes increasingly difficult to argue a bearish case.

Look back to the three “spikes” beneath the 200 week moving average and note that, while bears broke through this level three times, a simple close outside of this boundary did not mark a “new bear market.”  These were “Bear Traps” and we could arguably have a “Bull Trap” in that price could close above the area and then fall beneath it… but that’s a lot to ask.

Taken together, we have the following argument for expected resistance:  2,251, 2,160, and 2,214.

A break and close above 2,251 would violate all these levels and would put the argument squarely and objectively within the bullish camp.  Until then, it is generally expected that these levels will hold, thus forming a deeper retracement down from these overhead targets.

Let’s keep watching these targets as final lines in the sand between objective market classifications between bull and bear markets.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

9 Comments

9 Responses to “The Final Line in the Sand Overhead for the NASDAQ”

  1. chartsandcoffee Says:

    I like the analysis. Many are calling this the turn (some have called tops 10 times) but the main indexes have not even broken the 50, 200 or 300 day SMAs. I think the dollar breaking trend today is a big deal but we'll have to see how that plays out over the next couple of days to see whether it confirms.

    CC
    http://www.chartsandcoffee.com

  2. xcss Says:

    Thanks, look at de USD-index..last picture on my stockchart site:

    http://stockcharts.com/def/servlet/Favorites.CS

    Ending diagonal???

  3. york28 Says:

    why do you use 3,10,16 MACD versus the usual 12,26,9

  4. Corey Rosenbloom, CMT Says:

    York,

    The 3/10 Oscillator was taught to me by Linda Raschke and I've been using it ever since as a momentum oscillator, particularly in regard to divergences and momentum peaks.

    A post reveals more:

    http://blog.afraidtotrade.com/how-do-i-create-t

  5. brophy Says:

    Corey:
    Excellent work as usual. However 7/14 low-2167, 10/19 high-2190, which means the uptrend has already past the point that converts this from a W 4 to a W3 does it not? My Advanced Get Elliot Wave count has already changed automatically to a W 3 because of this. Would make sense since, do we really expect a wave 5 drop from these levels, given the Bernache PUT, the printing of money and the FED doing all it can to assure everyone all is well. I see a Wave 4 pullback re Fib levels and more upside. Your thoughts?

  6. Dan de Man Says:

    Hi Corey, I hope I'm not stepping on your toes but I just wanted to add a comment to this trader.

    I use the 3/10, along with a full stochastc 5/3/3. I know the histogram shows momentum but I think the stochastic give you more of a heads up when momentum is changing.

    Here's a chart of USO now underwater, below the 10 day ema:
    http://stockcharts.com/h-sc/ui?s=USO&p=D&yr=0&m

    Cheers,
    Dan

  7. zstock Says:

    QQQQ fib 61, is 43.8, reached 43.6

  8. zstock, Pro Select! Says:

    QQQQ fib 61, is 43.8, reached 43.6

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