Technical analysis is just as much art as it is science and this makes charts open to interpretation. The advance in the Nasdaq Composite over the last few months provides a classic case and point. In Elliott terms, this is either Wave 3, which would imply further room to run, or Wave C, which would imply that the end is nigh.
In this week's chart, the Nasdaq Composite may seem overbought as it consolidates near the 62% retracement mark, but the trend remains up and the current move looks like a Wave 3 advance. Wave 1 extended from 1108 to 1521 (413 or +37%), and Wave 2 formed as an ABC (falling flag) correction back to 1253. Wave 3 is usually the longest in both duration and price appreciation. A typical projection is 1.618 times Wave 1, which would forecast a move to around 1920 before a pullback (413 x 1.618 = 668, 1253 + 668 = 1921). This would coincide with the Mar-02 high and give the index another 200 points upside.
The alternative count would be an ABC correction or massive reaction rally within a larger downtrend. With the index at the 62% retracement mark already, the move could be nearing an end. In addition, Wave C is expected to be relatively equal to Wave A (413 points or 37%), which would project an end between 1666 and 1716 (1253 + 413 = 1666, 1253 x 1.37 = 1716). The index
has overshot both of these levels, but the Nasdaq is quite familiar with overruns and has met resistance around 1700 over the last few weeks. Finally, 12-week RSI moved above 70 and has become overbought for the first time since Mar-00.
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