This Week's NASDAQ High Was A Lonely Place

• Tuesday was a Key Reversal Day
• Breadth fails to confirm Tuesday’s high
• Primary uptrend is intact, but will it be threatened?

Tuesday was a Key Reversal Day

This week the NASDAQ Composite registered a new all-time-high, but the quality of that rally leaves a lot to be desired. That suggests that some kind of correction is in the wind. Don’t get me wrong, I am not calling for a bear market, as there is insufficient evidence to justify such a view at this point. Indeed, even the small up trendline in Chart 1 is still intact. However, when you look under the hood, it is apparent that there is a very weak underlying structure supporting this rally. If we are to see new highs, it will likely be preceded by some near-term consolidation or price weakness.

Chart 1 shows that Tuesday’s action represented a small key reversal day. Bearish key reversals develop after a short-term rally. The “key” day opens up with a gap, reflecting strong buyer emotion. By the close though, prices return to approximately the same point they closed on the previous day. This tells us that it is the sellers who now rule the day. In order to reflect the change in intensity between bulls and bears, it’s important for the key reversal day to be a wide one (indicating an important battle) as well as an active one (suggesting that a lot of people are trapped on the wrong side of the market). In Tuesday’s case these requirements were both met, though not in a truly outstanding way. However, it is also apparent the Tuesday’s action opened above the green resistance trend line and closed below it. That indicates exhaustion on behalf of buyers, because they were unable to hold the price above that resistance. It therefore, further underscores the validity of the key reversal. The chart also tells us that the short-term up trend is still intact because the Index continues to trade above its April-July up trend line and (blue) 50-day MA. That support is likely to be tested because of Tuesday’s action.

Chart 1

Breadth fails to confirm Tuesday’s high

Previous to July 9, the NASDAQ A/D Line moved in gear with the Index itself. Since then this breadth indicator experienced weakness, whilst the Index went on to new highs. We cannot yet say that the A/D Line is in a short-term correction, because it has yet to cross below its 50-day MA and May-July up trend line. However, it seems likely that Tuesday’s bearish action will put downside pressure on prices resulting in a violation of both these benchmarks and confirming the negative divergence.

Chart 2

Chart 3 compares the NASDAQ Composite to the number of NASDAQ stocks trading above their 150-day MA’s. It confirms a similar message being transmitted by the  A/D line. In other words, as the Index went on to register new highs in July, a lot of stocks were dropping below their 150-day MA’s. It gets even worse, because the 150-day indicator has broken down from a top, indicating that recent weakness is likely part of a new trend.

Chart 3

One indicator whose price action usually reflects that of the market,  is the bullish percent. Chart 4 features this series calculated solely from NASDAQ stocks. What is truly interesting, is the fact that the Index registered a new high this week, but the Bullish Percent could not even manage to rally above its 20-day MA. In my book that’s a serious discrepancy I have rarely seen before.

Chart 4

In technical analysis we rarely get a clue as to the quality of a forthcoming move, such as whether it will be a strong or weak one. However, one characteristic that is often followed by an above average move develops when a market or stock makes a new high and a specific momentum indicator is barely able to rally above the equilibrium level. That has recently happened between the NASDAQ and the McClellan volume oscillator, or in this case, its 10-day MA. This relationship is set out in Chart 5, where you can see that the indicator peaked in mid-July. By the time the Index was registering new highs this week, the indicator was already well below the equilibrium level. The arrows reflect two previous mild examples of this phenomenon, but nothing as egregious as the current example.

Chart 5

Chart 6 featuring the 25-day ratio of NASDAQ advances and declines shows the same sort of phenomenon, where it was actually negative, as the Index was basking in new all-time-high territory.

Chart 6

Primary uptrend is intact, but will it be threatened?

I mentioned earlier that the characteristics experienced in the last few sessions only had short-term significance and that the bullish long-term (primary) trend is intact. Chart 7 shows this for both the NASDAQ Composite and its A/D Line, since both series are above their 200-day MA’s and bull market trendlines.

Chart 7

However, Chart 8 shows that the Special K (SPK), whilst still bullish is, nevertheless overextended. You can read about the SPK here. In addition, it’s not that far from its signal line and the red trend line. Consequently, it’s possible that the next short-term decline could result in the SPK falling below its red signal line and 2016-18 up trend line. The chart shows that the last time such a development took place it was followed by a mini-bear market trading range environment. Not a forecast, just something to watch out for.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.