According to the Elliott Wave Principle (EWP), stock market indices follow predictable patterns that repeat at all time frames. These patterns can be used to anticipate the future trajectory of an index. By assigning a primary plan and a contingency plan, a trader can prepare for market fluctuations with better accuracy. In this context, we are looking at the NASDAQ 100 index, which experienced a dip yesterday but bounced back today. This sudden turnaround may have caught many traders off-guard.
Figure 1 presents an hourly-resolution chart of the NDX since the March 13 low. The chart depicts how the EWP helps predict the exact points where the index should top and bottom. Although there are a few misses along the way, the EWP interpretation of price action tends to be highly reliable and accurate. As a result, the index has now reached a potential larger topping zone between $13940 and $14230, indicating that the sky may not be the limit as it seems now.
Further examination of the rally since the late-April low (red W-b) provides additional clues. Figure 2 shows that the NDX did five grey waves up from the April 25 low to the April 28 high, establishing green W-1. Then, a clear three waves lower were observed to complete green W-2. According to a standard Fibonacci-based impulse pattern, several wave trends can be observed, such as:
- The 3rd wave often reaches the 138.2-161.80% extension of W-1, measured from the W-2 low. This is shown by the blue “local topping zone”;
- The 4th wave often retraces back to the 123.60-76.40% extension of W-1;
- The 5th wave often extends to the 176.40-200.00% extension of W-1 ($13940-14075);
- In a standard impulse pattern, wave-2 = wave 4, and wave 5 = wave 1. Note that these relationships are not set in stone, but they provide helpful guidelines. As long as W-3 is not the shortest wave and W-2 and W-4 do not overlap, extensions and truncations are still possible.
Last week, the NDX peaked only slightly above the 161.80% extension, then bottomed out yesterday only slightly above the 100% extension. Today, NVIDIA’s (NASDAQ:) in the market has allowed the index to reach the ideal W-5 target zone. Despite allowing for somewhat higher prices still, the NDX has now reached the bigger topping zone. Based on this observation, appropriate measures should be taken concerning trading decisions. While there are no current signs of a top being in place, a drop below yesterday’s low may suggest that a top has been reached.
In conclusion, the analysis of the NASDAQ 100 index using the Elliott Wave Principle shows that the index has reached a next larger milestone. Although the forecast is not perfect, traders can gain a better understanding of potential market fluctuations by using a proven and reliable method like the EWP. The index will have to trade above $14230 to confirm that the green W-5 is still underway.
