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Nasdaq 100 Forecast: Inverse "Head and Shoulders" Pattern Hints At Upside Potential

Nasdaq 100 Forecast: Inverse "Head and Shoulders" Pattern Hints At Upside Potential

Margaret Yang, CFA, Strategist

Nasdaq 100 index Technical Forecast: Bullish

  • The Nasdaq 100 index resumed its upward trajectory, aiming to challenge its record highs
  • Prices have formed a typical inverse “Head and Shoulders” chart pattern, which serves as a strong bullish indicator
  • A completed pattern may hint at further price gains with an eye on 14,386

The Nasdaq 100 index ended a consolidation period and has resumed its upward trajectory since early April. Prices formed a typical inverse “Head and Shoulders” (H&S) pattern from mid-February through March, paving the way for further upside potential as highlighted in the chart below.

“Head and Shoulders” tops and bottoms – the latter is also known as an inverse “Head and Shoulders” pattern – can be strong trend-reversing indicators. The former is bearish in nature and usually appears when a uptrend is exhausted and due for a correction, whereas the latter is bullish and is typically formed when a downtrend is depleted and about to turn around. The benefit of this chart pattern is that it defines areas to set risk levels and profit targets.

A general rule of thumb suggests that the high point off the “right shoulder” will specify the stop level whilst the vertical distance between the neckline and the high of the “head” will approximate the limit distance – 1,083 points in this case. A completed inverse “Head and Shoulders” may pave the way for the Nasdaq 100 index to challenge 14,386 – a level generated by adding 1,083 points to the neckline. This trade set up implies a risk-reward ratio of roughly 1.6 if a long entry order was placed when price just broke above the neckline.

Nasdaq 100 Index – Daily Chart

Chart by IG

The Nasdaq 100 has also decisively breached above the moving average lines last week, potentially pulling the 20-day SMA above the 50- and 100-day SMA lines and leading to the formation of a “Golden Cross”. An immediate resistance level can be found at around 13,900 - the previous all-time high. A firm breach above this level would likely intensify near-term buying pressure and carve a path for price to challenge 14,000 and then 14,386. A failed attempt however, may lead to a pullback towards the neckline at 13,290.

The MACD indicator is trending higher above the neutral midpoint, underscoring strong near-term upward momentum.

On the weekly basis, the Nasdaq 100 index has returned to its primary uptrend after a brief technical correction. The trend-defining 10-period SMA line has flipped upward, suggesting that near-term path has turned bullish. A Fibonacci extension points to a key resistance level at 14,300 - the 61.8% mark – if price can hold above the 50% extension (13,600).

Nasdaq 100 Index – Weekly Chart

Chart by IG

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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