As seen in the chart below of the Nasdaq 100, the index rallied up to resistance over the last few days and then sold off hard from that level (red line and arrow). This would be a natural spot for the rally to stall/retrace after improving by 38% from its lows. Ultimately we think the index can work above this level after a good pullback/retracement of some magnitude. That said the next level of good support on the index is the 1,284 level (dashed blue line). This level coincides with a Fibonacci retracement level as well as support from the earlier range breakout and would be a logical downside target and support level. Ultimately, and only mentioned as a frame of reference, should we eventually work above yesterday’s resistance level the next target up would be 1,700, which would be a combination on a downtrend line and the next resistance zone (dotted maroon lines and green line). However for now we are more concerned with the present, which suggests we are in rally correction mode.
Certainly there was some conviction to the selling yesterday as down volume swamped up volume by a ratio of 27 to 1 and decliners bested advancers by a 6.2 to 1 ratio. For now the near-term trade direction is down until proven otherwise via internals improving dramatically and/or yesterday’s resistance being decidedly cleared.
Nimble traders can trade from the short side for a bit while others may want to use an index ETF to grab some temporary short exposure. Additionally, for those who have substantial paper profits, we would tighten up the stops.
Source: Kevin Lane, Fusion IQ, May 14, 2009.