NASDAQ COMPOSITE ($COMPQ): DAILY THE RALLY TO 5000

Despite the unprecedented rally, the price action continued higher. Figure 1.4 shows the incredibly bullish price action from early 1999 to the top in March 2000. I discussed the significance of the violated 3.14 extension in my January 2000 NASDAQ Composite market report.

FIGUREE 1.4

“This latest NASDAQ rally has been incredible. The volatile action in some of the biggest NASDAQ stocks, such as Qualcomm and Yahoo, has left many wondering if this is truly a “blow-off” top. And that is the big question! In the past few weeks, the index has rallied above the extreme 3.14 projection from the August correction. Although the NASDAQ did sell off after exceeding this level, it has found support in this area. One note of caution: With such sharp action, the index could rally to the 1.618 of the XA leg, which would put it at 4500! Believe it or not, I think this is possible. Stay cautiously long but watch the first area potential resistance area at 4300.”

THE INEVITABLE DECLINE

It was coming. You could feel it. Tired and drunk on 30% year-over-year gains, the NASDAQ Composite was sitting like Humpty Dumpty on the wall, and he was ready to fall! The index tested the 5000 area briefly and started to stall. The one question on everyone’s mind was: “Is this sustainable?” Clearly, it was not. Although making an arbitrary decision that the 5000 level is critical psychological resistance does not represent the most cogent argument for a top, the inability of the index to rally significantly above this area was the first sign of trouble. The index started to roll over shortly after testing 5000, as it completed the all-time peak of the bull market. Although the 5000 level had the ominous feeling of a historic top, the price action still needed to exhibit technical behavior of the breakdown at hand. In my opinion, the top could not be confirmed until the price action actually started to break down and begin to exhibit bearish behavior. As a side note, I have spoken to many market technicians in past conversations regarding the top in the NASDAQ at 5000. Many of these analysts made accurate predictions, calling for a peak in the 5000 area. Intuitively, this seemed the right call. However, the price action still needed to begin to manifest such behavior. From a Harmonic Trading perspective, the NASDAQ Composite offered several distinct signals that confirmed the top at 5000. The first was a distinct Bearish Bat that was forming on the retest of the initial peak above 5000. In my NASDAQ Composite March 2000 market report, I outlined this setup:

“The NASDAQ formed another clear pattern, as the bearish Gartley that completed recently has yielded a nice reversal. The pattern was projected to complete around 5000—just past the .786 off the high.”

NASDAQ COMPOSITE ($COMPQ): DAILY

BEARISH BAT—MARCH 2000

Much like the Bearish Gartley in the S&P 500, the Bearish Bat shown in Figure 1.5 was the harmonic pattern that marked the beginning of the bear market for the NASDAQ.

FIGUREE 1.5

This was the first significant failure of a prior high within the established bullish trend in nearly five years. For the NASDAQ Composite, the prior two years represented one of the strongest bull markets in history. Although I maintained a bullish position from 1998 until September 2000, this pattern was clearly signaling trouble for the NASDAQ Composite on a long-term basis, and its completion was one of the primary reasons for my bearish position.

NASDAQ COMPOSITE ($COMPQ): DAILY

BEARISH BAT—AUGUST 2000

After the initial decline from the peak at 5000 was complete, the NASDAQ Composite consolidated to form another Bearish Bat pattern at the 4200 level in August 2000 (see Figure 1.6).

FIGUREE 1.6

The price action following the completion of the pattern signaled another devastating continuation of the severe bear market at hand. In fact, this Bearish Bat resulted in an acceleration of the entire bear market, as the index quickly declined from just above 4000 to well below the 3000 level.

NASDAQ COMPOSITE ($COMPQ): DAILY

BEARISH BAT—JANUARY 2001

As if 2000 was not devastating enough, the index formed its third Bearish Bat for the year. Although the NASDAQ Composite reversed shy of the 0.886 retracement, the index reversed sharply, as another distinct PRZ marked the continuation of the devastating bear market (see Figure 1.7).

FIGUREE 1.7

After losing nearly half its value, this pattern marked another corrective peak within the downtrend. Although it might have seemed that the pattern would not result in a significant decline due to the devastation of the past year, this Bearish Bat led to largest percentage decline of the entire bear market.

THE MONSTER BULLISH GARTLEY THAT FAILED

After a few nasty continuations from distinct Bearish Bat patterns, the index was clearly in the midst of a historic decline. The decisive bearish continuation throughout this decline was indicating the severity of the downtrend. In fact, as early as October 2000 in my NASDAQ Composite Market Report, I discussed this technical possibility long before it was actually realized.

“If the index breaks below these lows at 3000, the NASDAQ will most likely fall quickly in crashing fashion… there is ‘nothing but air’ below this area… the overwhelming convergence of harmonic numbers is in the 2200 area. This would be an extreme target on the downside and represent a significant buying opportunity.”

NASDAQ COMPOSITE ($COMPQ): WEEKLY

FAILED BULLISH GARTLEY—APRIL 2001

After realizing the next convergence of weekly projections indicated that the index was headed for the 2200 area, as illustrated in Figure 1.8, I truly believed that this would be a substantial low for the NASDAQ Composite Index. However, this was merely a brief stop in a further slide that would take the index much lower. Although it did not seem possible at the time, I knew that a severe violation of this long-term harmonic support would trigger another steep continuation of the bear market. Although a minor bounce was experienced on the initial test of the upper range of the PRZ, the price action severely lagged in this area. Furthermore, the eventual continuation of the decline underscored the severe bearish condition that would require much more time to stabilize and to reverse the downtrend.

FIGUREE 1.8

NASDAQ COMPOSITE ($COMPQ): WEEKLY

FAILED BULLISH GARTLEY POTENTIAL REVERSAL ZONE (PRZ)

The chart in Figure 1.9 shows the overwhelming convergence of harmonic numbers that defined the PRZ range between 2165–2275. The weekly PRZ clearly shows the decisive price action that violated this harmonic support. In fact, the index bounced briefly after exceeding this area on the initial test, only to continue lower after reversing from the prior failed PRZ.I remember thinking at this point: “Can it get any worse?”

FIGUREE 1.9

NO MORE HARMONIC SCENARIOS—NOW WHAT?

At this point, the persistent downtrend that violated the monster weekly Bullish Gartley was signaling more trouble ahead. One of the dilemmas with the monster Bullish Gartley was that its structure could have possibly been interpreted as a Bat pattern. Specifically, the B point of the pattern was not an exact 0.618 retracement. Hence, the possibility that the entire four-year price structure could actually result in a completion of a Bullish Bat in the 1700 area quickly became reality, as the index sank under the 2200 level. Below the multiyear 0.786, the only other harmonic number to consider was the multiyear 0.886 retracement at 1750. This scenario was difficult to imagine at the time, but the overwhelming bearish trend eventually drove the index to test under this area, as well.

Although the alignment of the structure was somewhat in question, the pattern was distinct enough to have been interpreted as a Bat and not a Gartley. Regardless, the index continued well beyond this level too. Eventually, the NASDAQ Composite even violated the original low point (X) of the pattern that was established in 1998—essentially erasing all of the gains made from the past four years.

NASDAQ CONCLUSION

Despite bottoming above the all-important psychological 1000 level, the total destruction of this multiyear bear market was on par with the greatest declines of all time. Quite frankly, the multiyear NASDAQ Composite chart is similar in structure and magnitude to the Dow Jones Industrial Average Crash of 1929. Although the Crash of 1929 was more severe, the NASDAQ Composite lost an astounding 80% of its total value and the devastation remains to this day. Despite the upside progress since the bear market low, the index has languished in comparison to the other major indices, as it has barely retraced to the all-time 38.2% minimum bear market level, as of this writing date.

The parabolic rise and ultimate decline of the NASDAQ Composite during this time was one of the most challenging trading environments that I have ever faced. Although I realized the extent of the impending bear market early on and stayed exclusively on the short side for most of this period, the initial failures of substantial bullish patterns, especially in those first nine months, taught me a great deal about their importance as continuation signals. Furthermore, the action in the NASDAQ Composite led me to respect the importance of the predominant trend in all trading situations more than ever before. Whether I am trading on a 5, 15, 60- minute, or daily time frame, I now analyze all setups with respect to the predominant trend. For the NASDAQ Composite, the price action eventually broke out of the multiyear established downtrend channel after reversing from the bear market low. But, this required quite a bit of time before the trend reversal was confirmed.

The most important consideration from the NASDAQ Composite advisory experience was the respect that I now possess for the ability of distinct patterns to define critical turning points in the price action. Whether a harmonic pattern reverses successfully or fails the PRZ, the technical information provided by this phenomenon to act as “action spots” of the overall direction of the price action that can define excellent trading opportunities.

The lessons learned from the NASDAQ’s performance during this time reinforced some important concepts within the Harmonic Trading approach. Despite the devastating decline, the various harmonic patterns and long-term Fibonacci ratios proved to be extremely effective measurement tools that provided consistently accurate information in the NASDAQ Composite analysis during an era of market extremes that comes along once every century!