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NASDAQ OVERBOUGHT, BUT NOT BEARISH

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The current rally is the strongest of the year and is unlikely to disappear over night. This strength is confirmed by price movement as well as two momentum indicators. First, the 15-day Rate-of-Change surged to levels not seen since early September and mid November. Second, 15-day RSI moved to its highest level of the year. Third, the Stochastic Oscillator moved to its highest level since mid November. All three are testament to the power behind the recent move.

Even though the Stochastic Oscillator has become overbought, the 2004 rally suggests further upside before all is said and done. Notice how the Stochastic Oscillator became overbought in September, October, November and December (four separate times). The Nasdaq became overbought and pretty much remained overbought as it kept rising. Moreover, the Stochastic Oscillator remained above 50 the entire time. As long as this indicator remains above 50, I would consider the trend firmly bullish and expect higher prices.

RSI also shows further room for gains. This indicator becomes overbought when it crosses above 70. It lagged the Stochastic Oscillator in 2004 and did not become overbought until November. Notice how RSI held the green trendline the entire rally and the red trendline the entire decline. I would look for a new trendline to emerge in the next few weeks and this will define the current uptrend.

Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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