Thursday Update
Critical Supports
September 15, 2005
by David Yu
After a little burst of action in early Thursday morning, the market spent rest of the day in a narrow trading range. This was a typical consolidation pattern when the market hits a critical support.
Since there's no volume data for the intraday chart of the NASDAQ Composite, I'm using the QQQQ instead. Chart 1 below is a 14-day 30-minute intraday chart. Q held its ground quite well today right at 39.10. This strong support came from the large advance on Sept. 6 & 7 (see black horizontal arrow). These two strong updays with large buying volume (black vertical arrow) rendered strong support at this level.
Shareholders established their long position on those two days are not likely to sell unless this support is breached or there's a fear factor. Since there's still a strong bullish sentiment in the market, the sell-off is not likely to happen until this support is violated. This support was built on the gap-up on Sept. 6, the first trading day after the Labor Day weekend. The upper end of this gap, 38.91, became a critical line of defense for Q (and the NASDAQ). And, it's just as critical from the longer term view.
Chart 1
This daily chart below shows the Sept 6 gap happens to be where the NASDAQ began to break down in January (blue line). After falling below the 38.91 support, the NASDAQ came back and attempted to break above this support-now-turned-resistance for 2 weeks to no avail (red circle). After these two weeks of failed attempts in January, the market couldn't recover for the next 6 months.
In addition, coming down to this 38.91 support would also mean falling below the 20-day moving average, which is at 39.01 (not shown on the chart).
Chart 2
Chart 3 below shows that S&P 500 also exhibits similar gapping action. Again, I'm using S&P's Exchange Traded Fund (Symbol: SPY) intraday chart in order to display volume. It's imperative to monitor these support levels in order to strategize trading plans.
Chart 3
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