NASDAQ and S&P at a New High, But It's Very Lonely Up There

This week saw the NASDAQ and S&P Composites rally to a new high, but not the DJIA, NYSE Composite, Unweighted S&P and Russell 2000. That's not necessarily the kiss of death, as these discrepancies can always be cleared up over time. In any case, Chart 1 shows that these averages are all close to breaking out themselves. If the bullish end-of-the-month seasonal, which kicks in next week, is powerful enough to enable the NASDAQ to build on its breakout and drag a few more indexes higher, especially the NYSE, count me in. On the other hand, if the breakouts do not hold, then we could be in for an extended period of correction.

My caution is based on several internal indicators, which have been showing weakness in the face of an advancing NASDAQ and S&P Composite. That raises an amber flag concerning the validity of the breakout.

NASDAQ Indicators

The number of NASDAQ issues registering net new highs (Chart 2) has shrunk progressively since the March peak. This points up the fact that there probably far fewer issues breaking to the upside in support of the Index.

The NASDAQ has certainly lost some mojo because its relative performance has also been lacking. Chart 3, for instance, shows that the RS line is way below its February peak and even remains below its 200-day MA. One encouraging factor is that the head-and-shoulders breakdown did not hold. Normally, such whipsaw action is followed by an above-average rally. Clearing the 200-day MA and April peaks would be a sign that such a move is underway because it would also violate the green resistance line currently intersecting with the MA. As it stands right now, though, the RS trend is negative, despite the fact that the NASDAQ is one of the few averages at new highs.

NYSE Internal Indicators

Over at the NYSE (Chart 4), we see breadth, in the form of the cumulative common stock only McClellan oscillator, violating its dashed October/May up trendline. That break was also confirmed by the NYSE Composite itself. When an up trendline such as this is violated, one of two things usually follows; either there is an actual reversal or prices experience a trading range. If that trading range is resolved on the downside, the original break is re-categorized as a reversal. On the other hand, an upside resolution results in the original trend being resumed but at a slower pace. The break is then considered to be a consolidation or continuation one. So far, the May trendline violation has been followed by an unresolved trading range. It could turn out to be a head-and-shoulders top or a bullish continuation one.

The McClellan oscillator also experienced a trading range of its own, but has now broken to the downside. Usually, oscillator weakness is eventually accompanied by a drop in the NYSE itself, but that does not always happen, as we can see from last September's break. In that instance, the NYSE traded sideways for a while following the oscillator's break to a new low.

In the current situation, it's possible that the trading range could turn out to be a head-and-shoulders top, but only if completed. That would happen with a decisive daily close that can hold below the previous low at 16,400.

Chart 5 displays the same kind of weakening breadth action, but this time from the percentage of NYSE stocks above their 50-day MA. It's similar to three previous setups that have taken place in the last few years, each of which was followed by some form of corrective activity.

An indicator that helps to identify many short-term price movements is a change in direction of a 10-day MA for a 12-day ROC. An example is shown in Chart 6 for the DJIA. It can also be helpful when it has been above zero for 3 months or more and then crosses below it. All four such setups since 2018 were associated with a decline of some kind. The July 2020 example has been flagged by a dashed arrow to indicate that a decline did take place but the signal came too late to be of any profitable use.

This week has seen a fifth such example. Ignoring the extremely marginal penetration that took place in February, the current negative zero crossover has developed after a pretty lengthy seven-month period where the indicator traded above it.

Conclusion

The vast majority of the long-term indicators I follow continue to offer a positive backdrop. However, the more-or-less solitary breakout by the tech-dominated NASDAQ and S&P Composite, combined with internal weakness in some of the breadth data, throw up some questions on the validity of the breakout. A strong showing going into early July could clear up most of these discrepancies. Indeed, if the NYSE can move to a new high, that would be very bullish, since it would mean that its potentially bearish head-and-shoulders top had not worked. An above-average-type move typically follows such setups. However, if the NASDAQ and S&P breakouts do not hold, that would suggest that the overall corrective environment that has taken place since February is likely to extend.

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 Groupof Walnut Creek or its affiliates.