NASDAQ: Bullish Reversal, Or Bull Trap?

(Click On Charts To Enlarge)

Chart #1: NASDAQ Daily: On Thursday's swoosh to the downside, I suspect that more than a few players were watching the lower trendline of this wedge. The NASDAQ came within just a couple of points of it, validating as support, then banged higher on a bullish Key Reversal candle. As I've said elsewhere, if this ISN'T some kind of decent bottom, it will be one of the best Bull Traps that I've ever seen because it accomplished THHEE important things on Thursday that certainly looked very bullish:

1. The pattern is a "Three Drives To Bottom" (I think that's Larry Pesavento's baby). Successive "lower lows" that finish with a reversal, which we got.
2. The third drive to the bottom ALSO was a trendline validation. It held beautifully, and bounced right there.
3. Thursday was a bullish Key Reversal: a new low, then a close higher than the prior day's high.

So, if it is a Bull Trap, it's a great one in my opinion, but that's why it's a good idea to have a stop loss. It certainly could be a Bull Trap, which we'll find out in the coming sessions.

Chart #2: MACD: By late September, the NASDAQ had: (1) broken below a rising channel; (2) broken below horizontal support; and, (3) failed a retest of its 50DMA from below it. YUK.

Notice that when the MACD failed below its signal line in late September, it led to an UGLY smackdown in the NASDAQ. That "sell signal" was WITH the trend and the MACD was in bearish territory, below its zero line. Those signals often produce pretty good moves in the direction of the trend.

In late October, the MACD Double Bottomed with a bullish divergence between price, which was lower, and the MACD, which was higher. The bullish cross of the signal line produced a rally back to 1782 resistance (the high for the rally was 1785), but that was it. The NASDAQ tanked and went to Thursday's new low. That "buy signal" was against the trend from a deeply oversold condition in the MACD, so it produced only a dead cat bounce to horizontal resistance in a bear market.

The NASDAQ, currently at 1516, is roughly where the MACD Double Bottomed at 1505 in late October, but the MACD is much higher than it was back then, showing a BIG positive divergence between price and the MACD. That's "constructively bullish," but a bullish divergence in an indictor without price confirming it is meaningless unless/until price does confirm it. I put that in boldface because it took me a long, long time to learn that, and it cost me a lot of money.

We want to see the NASDAQ take out Thursday's Key Reversal high of 1597, for openers. Then we want to see the 1603 failed Double Bottom of Nov. 6 and 10 get taken out, then the 1679 gap, and finally a rally to the top of the wedge, currently at about 1720. At that point, MACD would be up near the zero line, poised to go up through its zero line on a pattern breakout, but that's getting way-y ahead of ourselves. The NASDAQ has a lot of work to do before then.

On the other hand, if the NASDAQ continues down, the MACD simply will roll over its signal line to the downside, and this current BIG positive divergence won't have meant squat. "Price will have trumped this 'constructively bullish' MACD indicator."