The broadening formation (potential megaphone top) on the Nasdaq Composite, which was initiated as our 'Chart in Focus' on Nov 13th is still very much alive, as the accompanying chart shows.

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The Nasdaq Composite daily chart - specifically a broadening formation (megaphone top) on the stock index chart - became our 'Chart in focus', last Friday.

At the time, the formation was just shaping up. Prices hadn't touched the upper line of the potential formation and found resistance from the same. Now, a week later, the index has touced that line and has fallen 70 points within 3-4 days.

Nasdaq Composite daily chart, depicting potential megaphone top

A megaphone top is complete only once the lower line is broken. That line is still a good 125 points away. So it'll take some doing, on the part of the bears. But if they're able to take out the falling support line that forms the base of this formation, we could see an eventual drop to the 1750-level or so; this target is derived by projecting downwards the height of the pattern, from the falling support level.

Once again, we're not saying that our bias is bearish at this point. In fact, we closed a large number of winning long stock and bullish options picks over the past few days and changed our bias from bullish to neutral, yesterday. The chart above is, as stated earlier, our 'chart in focus' and the development of this potentially deadly formation for the bulls over the short-to-medium term will determine our bias over the intervening period.

The bulls have enjoyed a very good couple of weeks and there is no denying the bullish undertone. Most of the indices are challenging the recent highs or have even broken the same. Ordinarily, such a breakout would be seen as opening up a potentially solid move to the upside into the end of the year. These projections are derived from patterns such as ascending triangles, bullish rectangles and the like. Moreover, the momentum indicators are not near overbought territory as yet.

So things look potentially rosy for the bulls. There are one or two things that do not jibe well with a continuation of upward price action, however. The primary of those is the fact that volumes have been below average and falling, during the course of the most recent leg upwards.

Nasdaq Composite

Another developing story that needs attention is a broadening formation that has shown up on the chart of the Nasdaq Composite. If resistance is found at or below the upper line of the formation, there is the possibility that the formation will become a megaphone top, which will lead to a sizeable decline in the index over the several weeks, especially if the lower line of the pattern ends up being broken following any finding of resistance at the upper line.

Given the potential impact of the setup, this chart is now our current 'Chart In Focus.'