The tech-heavy Nasdaq is currently higher by about 30% year-to-date, and both the index as well as many its component stocks still look to be in good technical shape.
Considering the steep slope of the index, however, it is wise to trade this tape from the long side with increasing cautiousness … while also understanding that the trend can continue for longer than most bears can remain liquid.
In order to get an idea how far to the upside the index could potentially rise in the medium term, let’s take a look what the charts say.
The long-term view of the Nasdaq (seen in the weekly chart looking all the way back to the late 1990s) shows an index that has now, some eleven years after its dot-com crash bottom, comfortably retraced more than 61.8% of the entire crash.
When measuring the temperature of a security or index in a broad sense, I often refer to important Fibonacci retracement lines — like the ones drawn out on the below chart. From this point of view, the Naqsdaq’s next bigger resistance area is around 4,120 — roughly 3.5 to 4% above Thursday’s close. That’s where 75% Fibonacci retracement of the entire crash comes in.
On the daily time-frame, the Nasdaq continues to show an orderly ascent where consolidation patterns lead to clean breakout moves. Yes, momentum oscillators show the index as overbought. But in strongly trending markets, such overbought readings can remain for a long time.
What would concern me more is if we were to see negative divergences between momentum and prices. Thus far we are not seeing such action, as price continues to rise along with momentum.
In terms of upside targets, the 4,000 level for the Nasdaq Composite is within arms reach and likely acts as a magnet for the near-term. Beyond that the index could extend up to the aforementioned 4,120 area. Some bulls are already talking about the 5,000 area for the index, which is close to the all-time highs set in the year 2000.
While ultimately the index likely will travel towards 5,000, for the time being most traders and investors are better off focusing around the 4,000 area, give or take 100 points, where some sort of consolidation is likely to set in before a next more meaningful climb higher sets in.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.