NDX showing two potentially bullish patterns?
- Peter Lee
- Oct 10, 2023
- 2 min read
Broadening Ascending Wedge Pattern
A broadening ascending wedge is a technical pattern with two rising uptrend lines, creating a series of higher highs and higher lows. The broadening pattern typically occurs when there is a shift in the balance of power between the bears and the bulls.
Three phases create the pattern: (1) The narrowing phase occurs where the upper (resistance) and lower (support) trend lines begin to diverge. (2) The buildup phase: The price trend sideways within the wedge. (3) The breakout phase occurs when the wedge breaks to the upside or downside, leading to the next directional trend.
A broadening ascending wedge will usually trade within the wedge until it breaks to either the upside or downside. Until the breakout or breakdown, it will usually trend sideways within the expanding pattern. Although many believe this pattern is a bearish reversal formation, breakouts can occur in either direction. Since it can lead to either a bullish or bearish condition, regardless of the time frame, an investor/trader must prepare for both scenarios.
Cup and Handle Pattern
A cup and handle remains an important chart formation that resembles a cup and handle shape. The cup resembles the "u" shape. The handle is a short-term downtrend. It is typically a bullish type of pattern. The right-hand side of the pattern tends to have lower trading volume.
The pattern develops after a sharp price decline. A bottom occurs and is soon followed by a rally. As the stock price trends up along the cup, traders and investors take profits, triggering a short-term price correction via the handle.
Although the duration of the pattern varies, the pattern's formation ranges from several weeks to several years. Studies show the cup and handle is a continuation pattern with a 95% probability of following through in the direction of the dominant or primary trend upon confirmation of a breakout.
The ideal pattern shows the depth of the cup or the retracement of 1/3 or less of the previous advance. Any decline beyond the 1/3 retracement suggests this is not a valid continuation pattern. Sometimes, in volatile markets, the retracement can be 1/3 to 1/2. Under extreme circumstances, the maximum retracement is 2/3.
The projection of the cup and handle pattern is often the height of the cup added to the breakout point of the handle, extending the bullish uptrend.
Nasdaq 100 Index (NDX)
Despite the widespread concerns from market pundits claiming the Nasdaq 100 Index and mega-cap technology stocks have peaked, a broadening ascending wedge pattern has quietly developed since 2012/2016. Surprisingly, the potential for a cup and handle pattern is also exciting.
It hints at the resumption of the long-term structural bull trend upon completion of the breakout above 15,754-15,841 (Oct 2021 downtrend and Jul 2023 highs) and preferably above 15,573.34 (Nov 2021 all-time highs).
Could a year-end to early 2024 rally lead to the pivotal breakout?
Comments