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The Nasdaq could be forming a Head and Shoulder Pattern

David Becker
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The Nasdaq could be forming a Head and Shoulder Pattern

The Nasdaq Composite is in the process of forming a topping pattern. When a market continues to make new highs it is in an uptrend. The difficulty comes when it is also making lower lows which is associated with a downtrend. This creates a head and shoulder pattern, which is a reversal pattern that comes at the top of an uptrend.

The left shoulder and head are now in place and the right should continues to form. A break below the neckline could spell trouble for the composite index. The topping structure occurs when the index starts testing the 200-day moving average and can not get back above the 50 day moving average. The next stage is the 50-day moving average starts to turn down and the index falls below the 200 day moving average. The final phase to watch for in a structure is the failure of the chart to move back above the 200-day moving average after retesting from below.

This has to happen in order for a downtrend to commence. So far, the $COMPQ is trapped between the 200 day moving average as support and the down sloping 50 day moving average as resistance. How this resolves is crucial. If the $COMPQ index moves below the 200 day moving average again, this will make the 50 day moving average and 200 day moving average overhead resistance levels rather than support levels during the uptrend.

Momentum is still positive but the trajectory of the MACD is flat and is poised to generate a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The RSI also moved lower with price action reflecting accelerating negative momentum.

chart-nasdaq-forming-head-shoulder-pattern.png

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