Double Top Chart Formation:
The Nasdaq rallied for about 3 months between the beginning of March to mid May. At the end of the rally, the chart peaked on May 19th at 2551.47 and quickly drifted south thereafter, hitting a bottom on May 23rd at 2430.36. The chart reversed and began to head back up peaking on June 5th at 2549.94. After the formation of the 2nd peak, an accelerated decline occurred, pushing the chart under the support line set by the May 23rd bottom within a period of 5 days on June 11th. A test of the newly formed resistance line occurred on June 13th, but with minimal success. The Double Top chart formation was confirmed as the new found resistance test failed and it broke through the old support line with stronger than normal volume.
A – 2 peaks within a span of 3 weeks formed on May 19th 2008 and June 6th 2008. The first peak occurred at 2551.47 and the 2nd peak topped at 2430.36.
B – A prior upward trading channel had formed from mid March to mid May ending on May 19th, 2008, the first peak within the Double Top Chart formation.
C – After the formation of the 2nd peak on June 6th 2008, an accelerated decline causes the chart to quickly smash through the old support set by the trough on May 23rd at 2430.36.
D & E – The lack of volume in the 1st break resulted in an end to the downward trend. A test of the new support turned resistance line occurred with a small brief rally. On June 20th, the Nasdaq broke through the old support line with a surge in volume, confirming the formation of the Double Top chart pattern.
I – The different between the highest peak at 2551.47 and the trough at 2430.36 is 121.11. As such, a price target of 2309.25 is set to be hit within the next few months.
In addition to the chart pattern, other technical indicators that spoke of a coming down trend are the following:
F – On June 6th, the RSI index dropped below the 50 mark, indicating the relative strength of the chart has changed and an increase likelihood of decline.
G & H – The slow MACD line crossed the fast MACD line on May 20th. The MACD continued to fall and finally broke the X-Axis on June 12th.
Fundamentals (Long Term Outlook):
The largest sector within the Nasdaq is Technology at 25% followed by Financial at 24%, Consumer and Health Care at 16% a piece, and all others making up the difference. The market as a whole continues to suffer from the financial meltdown, and as such the pressure from Consumer and Financial stocks will continue to weigh heavily on the Nasdaq. Large banks still have not instilled a level of confidence within the investing population. More write downs are expected across the board from almost all financial institutions.
Oil prices continue to rally, hitting a new high yesterday at $140 a barrel. This continued charge will have a heavy impact on the consumer stocks within the Nasdaq, further pulling it lower. Oil might be seeing a reversal in trend as more and more people jump on the “bandwagon”. At some point in time, the inability to supply oil at a reasonable price will severely slow emerging and developed economies throughout the world. This will cause an excess supply of oil and a sharp drop in demand. If oil/energy/consumption conservation habits start to further ingrain themselves within the emerging economies and begin to become more prevalent in the developed world, oil should drop back to the double digits.
Technology stocks had a strong rally overall within the past few months, but with most companies largest customers being Financial Institutions, there might be weakness within this sector in the upcoming months. Even though international sales can be depended upon to stabilize earnings, I am seeing that information already discounted within the stock price itself. The unknown is how badly is financial sector going to affect the growth rate of these companies.
