Last week the NASDAQ Composite broke the long term trend line that has defined the six month March/September rally. Since then it has been trading in a narrow range below that uptrend line and around its 50 day moving average.
The price action since the NAZ made its recent high and the consolidation after the trendline breakdown resembles a bearish flag pattern. A flag pattern suggests a measured move that is calculated by taking the height of the flag pole and subtracting it from the bottom of the flag itself. In this case, the target is measured by taking the September high/low range and subtracting it from the 10750 level. The NASDAQ measured move then projects down to and targets the 9500 area. This would be a 50% Fibonacci retracement of the March low and September high rally range. It would return the composite to its 200 day moving average.
On a percentage basis it is a 12% decline from current levels and more than a 20% pullback from its high this month. That would qualify as a correction in strict technical terms. At this point in time this bear flag analysis is speculation. Like all technical patterns it requires confirmation. But it is a textbook set-up. The Relative Strength Index has dropped below its centerline and the Money Flow Index is preparing to do the same. These readings represent a loss in positive price and buying momentum. They reinforce what is playing out on the chart.
A return to the 50% Fibonacci level, while temporarily painful for bullish investors, could be a healthy reversion. But it remains to be seen if the NASDAQ does in fact breakdown or, if it does, the pattern plays out as the chart so neatly outlines.