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Using Technical Analysis to identify trade setups on the NASDAQ 100

The market moves to a rhythm and for the most part, each day is similar and yet so very different. Trying to find a way to make sense of the nuances in changes is the challenge. Identifying whether the market is going sideways, up, or down is key to being profitable as it is what should determine which strategy you choose to deploy.

Nasdaq Weekly Index Analysis

The Elliott Wave Theory (EWT) is known to be a method of technical analysis that analyses long-term trends in prices and how they correspond to investor psychology. In the 1930s, Ralph Nelson Elliott came up with some specific rules for describing price patterns, which became known as 'waves.' These waves were focused on identifying and predicting stock market wave patterns and if nothing else, humans love noticing a recurring pattern. It's fundamentally one of the ways in which we identify danger or become more efficient when things work. These patterns are not intended as a certainty but are rather there to provide probable outcomes for future price movements. Keeping the original intent of the Elliot Wave theory of being able to suggest possibilities and probabilities, I thought it would be useful to look at the levels that I keep referring to on the Nasdaq to show how I anchor my thoughts on a daily to weekly basis.

Long Term Hypothesis

Attempting to identify every motive in an Elliott Wave count has long since ceased to interest me. However, there are some key points that have always stuck with me since I first became interested in it. To begin with, the third motive wave cannot be the shortest wave. In general, it is also the longest wave. A fourth correction will generally not go below the swing high at which the first motive wave terminates. Typically, if the second corrective wave follows an ABC pattern, the fourth will be more complicated. Corrective waves can correct over time as well as price, and when you get into trying to label some of the more expansive waves everything becomes very subjective and not very useful. With the EWT, trading in hindsight is much easier, so you will be able to make these counts over historical prices but very rarely into the future with any accuracy. Elliott Wave is also very useful when using Fibonacci retracements and extensions to add context to the levels.

I like to keep my charts simple, and this daily Nasdaq chart of mine is an example of that, as I want to take the most obvious trades. The Fibonacci indicator can be selected as an anchor and then used to show a range of prices, and the more you do so, the more you learn that markets move across numerous ranges as a multiple of the initial range. These are what I call trading ranges, and they work across all time frames. You can create a range based on anything from the first month of a year to the first hour of the US session.

Using the closing prices on the daily chart the Fibonacci extension shows a possible move up to 16,276. This price target may never get hit but it starts to frame the moves and opens up the possibilities of at least one last push higher. The corrective wave we’re currently in from the all-time highs could also be framed as a 4th wave and therefore has the potential to move towards the high of wave 1.

This would become self-fulfilling in a larger market correction as traders would generally be trading to and from big figures, like 14,000.

Zooming in slightly to see the market structure and the concept of Fibonacci extensions and retracements alongside Support and Resistance also becomes quite useful. I often look to the previous resistance to act as support as a trade location. If there is a confluence of a Fib level, a psyche level, or a dynamic support and resistance level from a moving average, that also helps. Currently, 14,000 is old resistance now acting as a level of known support. The daily 200 ema is sat there and in terms of EWT, it is possible that wave 4 could be coming down to test the highs of wave 1. The retracement of wave 3 has so far been somewhere between 38% and 50% but 14,000 would be exactly 61.8%. Which makes 14,000 a very compelling level.

This year was a special year as it started with a new US President, and generally, the first 2 years are corrective before the incumbent President starts throwing everything at the economy to make themselves look good, so they have a chance of re-appointment. The start of 2021 was a bit shaky for the Nasdaq and we tested above and then below the January opening range. When the market direction decided higher, there was another pullback but this time the mid-line of January’s range held as support. Coincidence? Maybe.

The all-time high was also very nearly x2 measured moves of the January opening range, which again could be a coincidence. However, the markets are fractal and I like to use the US session opening range every day as a way of adding context to the market and to make sense of the noise. In that respect, the same could be said about a range as large as the initial month.

The initial balance is the first hour of trading in the US session taking into consideration the high and low of that range. I am of the belief that these highs and lows when broken can give a sense of which way the market is looking to go. If only for a brief period. The initial balance is an hour’s worth of data, so I am suggesting that for however long your range is, that is the context in which to take the projected prices. Ideally, within the next hour to the end of the session, the price would get to my high probability target. If the range was a month, I would expand my time horizon by that magnitude.

For me on an intraday level, the measured move of the initial balance is 33%, so getting to that level is never a priority. Anything less than 50% and you’re into coin flip land. However, the 50% of the initial balance has around 66% probability of being hit and I often find that the market turns there on the tick or pushes through to the measured move (eventually).

You don’t have to use the opening hour of the US session or wait for the January month to end. You can pick any balance area, range, etc. to look for these breakouts and then target the measured moves of the range that you identified.

Technical analysis like this is always better when there are fundamental narratives to back the thesis up.

Currently, inflation is riding high, and the Fed especially may have been blindsided by the continuation in rising prices. At some point, they will react, and that point could come as soon as November 2021. There is also a lot of talk about the US debt ceiling and the political mess surrounding that could lead the USA to default on their debt, by political choice, no other reason. There is also the question of spending and budgets, and these elements all add up to GDP and a transfer of money from the government to the non-government.

The 2020/2021 fiscal year ended at the close of September and the trend in higher spending continued for that fiscal year. The total spending on the US economy amounted to $7.74 trillion and clearly a new record.

Spending this year has been above all previous levels of spending apart from the recent pandemic market crash adjustment. The black line is the fiscal year 20/21 and that graphic shows that it peaked in March 2021 and has drifted lower. This reduction in spending will either pick up if the Biden administration can enact their manifesto promises or it will drop back to historical mean prices. The drift lower in monthly flows could also be an early warning sign that forward guidance from corporations will not be as bullish as it had been in the past. Corporations tend to receive 40% of these flows and as we can see in the indices, the trend has been higher for a long time now. Getting back to pre-pandemic levels of monthly flows could also mean getting stock prices back to pre-pandemic levels. If the debt ceiling and spending plans get passed the return to increasing monthly flows could translate into higher indices prices, so I’ll be keeping an eye on the graphs.

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