Nasdaq Composite 12/20/08

Things are getting extremely tight on the shorter term time frames and daily chart. Starting with the 60 minute chart, there is an ascending triangle setting up and getting extremely tight. This should find resolution early next week. We continue to encounter resistance at the 1600 level, with trend line support around 1550. The oscillators have unwound sufficiently to allow for a breach of that 1600 level, but also have plenty of room to fall further. The daily chart is not so optimistic of a strong rally.

On the daily chart there are numerous red flags developing. We have a bearish flag/rising wedge developing right beneath our 50 EMA. This suggests a failure should be expected in short order as is common in bear markets around our 50 EMAs. Volume has been pretty light on this move up with an increase on Friday, a day in which there were net sellers. Looking at the oscillators, we can see that the RSI has unwound to the 50 region, another area where bear market rallies die. The MACD has unwound considerably off the bottom and is starting to flatten out here as it approaches the zero line. The zero line is usually the line in the sand for bear markets. Conversely the zero line also acts like the line in the sand during bull markets, but lends support. Lastly, we have negative divergence on the stochastics as it looks to leave overbought territory. 1600 remains stiff resistance with the 50 EMA not far above at 1630. 20 EMA remains support at 1537, after which there is not much support until 1400. All of this points to a high risk-reward profile on the short side with stops not far above the 50 EMA. My first target for this move would be 1400, 2nd target the November lows.

I hesitate to make the call for significantly lower lows due to the compressed nature of the weekly and monthly charts. They are still deeply oversold. If anything, I believe they are saying expect choppy range-bound markets in the coming months.

I post charts publicly on stockcharts.com under the following link: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2899092