Last week, I had commented on how the Nasdaq Composite Index was fighting against overhead resistance levels in the 1780 range. Last week, we saw the Nasdaq stall just beneath that level, in a minor pullback for the week – having closed beneath the prior week’s high for the first time in eight weeks.

This week, we watched the Nasdaq consummate the pullback by retreating deeper into known territory. For the first week in nine, its Friday close was lower than its Monday open.

Markets do not continually move in one direction. Even in trending markets, it is common to see a series of days move against the trend. Likewise when reading weekly charts. These counter-trend moves are considered both normal and healthy in a trending market.

They give the dominate players in the trend (bulls or bears) a chance to test support for a continuation of the trend. Without such counter-trend moves, traders get nervous – not seeing a nearby, tested and meaningful level of support or resistance.

This week, the Nasdaq moved lower in a test of the support it expects to find around the 1660 level. The Nasdaq’s move down was mirrored, although more aggressively, in the other market indexes. This week gave us a broad-based move down to test the legs of the remarkable rally we’ve witnessed over the preceding eight weeks.

We’ve witnessed a changing of direction, relative to the Micro-Trend, on the Daily Charts for all four major indexes tracked for this column. The week’s pullback was of sufficient strength to register a reversal of Micro-Trend (refer to GMT Indicator box in right side-bar). The Micro-Trend represents a two-week period.

On the Daily Charts, both the Short and Mid-Term trends remain bullish. The Long-Term trend, which represents a year’s activity, has yet to turn bullish during this rally off of March’s lows.

On the Weekly Charts, the pullback did not register any change. The weekly chart’s Micro-Trend remains up. The Nasdaq weekly chart still shows the Short-Term trend is up. All other GMT trends, based on the weekly charts, remain down.

As indicated in last week’s column, I thought it likely the Nasdaq would pullback this week in a test of support around the 1650 level. The Nasdaq did just that, bottoming at 1664.

Also, last week, I had mentioned the trading void that exits above the current rally’s high-water mark. A void is defined as an area wherein there are no obvious support/resistance levels and no previous lateral consolidation. Refer to the green rectangle I have drawn in the below chart to see the range I’m defining as a trading void.  This is a weekly chart of the Nasdaq Composite Index.

Also, on the above chart, note how I’ve labeled the prior week’s bar as hesitation. In my mind, it was logical to see the market approach this void with hesitation. That is exactly what happened two weeks ago. This week, we saw how last week’s hesitation give birth to this week’s pullback.

So far, the test of support is valid. The Nasdaq took a run at it but did not penetrate support. This test of support is indicated by the yellow oval drawn on the above chart.

Should support hold at this level, the Nasdaq can again approach the void above with renewed confidence that it is firm at the 1660 level. This would be the best case scenario.

Should the test of support at 1660 fail, the Nasdaq will enter a band of congestion (see the blue oval drawn on the above chart). I’ve drawn this lower support line at 1556; however, please recognize this is more a proxy for the range than a firm line in the sand.

Why do I say that? Look to the left. The large amount of lateral trading that took place within this range makes it a formidable band. Within the blue oval, you can identify over a dozen weeks’ bars that traded within this range. That should take some doing to penetrate. For that reason, I would term this lower band of support a stronger base than the above line at the 1660 level.

Next best case scenario, should support at 1660 fail, would be for the Nasdaq to reconsolidate within this lower band before resuming its attack on the trading void above.

To give more meaning to the weekly bars we’ve been looking at, let’s take a look at a daily chart for the Nasdaq.

I’ve drawn boxes around the last three weeks’ daily bars to give this chart quick visual perspective to the weekly chart we’ve been studying. The green box contains this week’s activity. The red box contains last weeks and demonstrates how it intersects this week’s trading activity. The yellow box is trading activity from three weeks ago.

First, in the green box, note how the Nasdaq tried to rally on Monday, failed on Tuesday, gapped down on Wednesday, and battled off the bottom on Thursday and Friday.

In the red box, note how the low from the prior week corresponded with Monday’s low. This level provided resistance for Thursday’s and Friday’s battle to put in a close up off the floor.

The low from three weeks ago (yellow box) seems to have been a recent validation of the hoped for support in the 1660 range.

I’ll be watching the coming week’s market activity with great interest. These are really exciting times.

I think the market, if it can prove there is support near current price levels, wants to rally up into the void. As the charts are setting up, I think one could support an argument for that scenario off of this week’s pullback.

Being a skeptic, and believing the market enjoys frustrating any who may take predictions too seriously, I wouldn’t be surprised to see the current test of support fail. This would mean a subsequent test of support at the lower range around 1560.

Further, that would mean the introduction of a new element into the charts. That could modify the swift ascent scenario begging to be launched from this week’s charts.

I’m more in the latter camp than in the former, but will remain flexible enough to trade either scenario.

Please Note: This article is an expression of my opinion. It’s meant to inform your thinking, not lead it. To be a mature investor/trader is to be educated – to think for one’s self. You are responsible to decide the best place for your money.

Always remember, any decision you make will put your money at risk – given that market conditions do change and the value of your investment will rise and fall based on those changing conditions.

Information presented herein was current at time of publication; however, change is inevitable. Data presented may have been overtaken by market events. Should you desire to act on information presented herein, always verify it against current market conditions.

I accept no responsibility for any loss or damage resulting directly or indirectly from the use of content in this article.

Disclosure: At the time of publication, I do not hold any positions in stocks mentioned in this article. I do reserve the right, however, to take a position at some future time.

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