Don't Be Surprised if the NASDAQ Jumps from Here

I've been bearish on the NASDAQ -- or, more specifically, on its relative action against the S&P Composite -- for about a year. Now that the financial press has announced that the Index, by virtue of passing the somehow magic -20% level, has "entered bear market territory", it might, from a contrarian point of view, be time to take a second look at the technical position to see what gives.

To start with, Chart 1 compares the NASDAQ to its RS line against the S&P Composite. It shows the large negative divergence between the RS and absolute price action between early and late 2021. A sharp and persistent drop followed. Now things are looking a bit more constructive, since the 45-day ROC has begun to diverge positively with the RS line, not unlike previous instances featured in the chart. They have been flagged by the green dashed arrows. Positive divergences in and of themselves do not tell us that the bear market is over, but do suggest that some form of counter-cyclical rally for both the Index and its RS line may not be far off. However, until the two down trendlines at 13,200 for the Index and 31.5 for the RS line are bettered, I am assuming that the short-term trend is down.

By way of indicating that some form of bounce is likely, Chart 2 tells us that, by any measure, the loss in NASDAQ relative action has been swift. Since the ratio is just a tad above its multi-year support trendline, this might be as good a place as any for a temporary respite. The chart also reveals a classic example of a false upside move being followed by an above-average drop, as participants scramble to get back to the right side of the market.

Chart 3 compares the NASDAQ to the NASDAQ Bullish Percent. Note that the indicator peaked in early 2021, but the Index kept rising until November of that year. This told us that the Index itself was in a bull market, but participation, in the form of the average stock, was gradually shrinking. That's never a good sign and prices have responded by dropping all year. One ray of hope now comes from the fact that this process looks as though it may be in the process of reversing. That's because the indicator saw its low in late January whilst the NASDAQ continued to edge lower. Note that a positive divergence preceded the March 2020 bottom.

Chart 4 features another NASDAQ breadth indicator. This time, it's new highs minus new lows. Notice how this indicator reached its low point in late January, yet the NASDAQ has continued to work its way lower. We are now at the point where a small reduction in new lows or a small increase in new highs could revert to positive territory where new highs exceed new lows. If so, that would be a very bullish short-term development considering how far the Index has sunk this year.

Early 2021 until the end of that year saw a very striking negative divergence between the high in the percentage of NASDAQ stock trading above their 200-day moving averages and the NASDAQ itself. I think there is a lot more downside to come as a result of this discrepancy. However, this indicator, like the previous two, is now experiencing a positive divergence, thereby adding additional evidence favoring a possible near-term counter-cyclical rally. The triggering mechanism, in this case, would be a break above the dashed green trendline marking the top of a small base and the 2021-2022 down trendline. To be decisive, that would require a rally to around the 26 level.

Conclusion

Back in late 2021, things looked bleak for the NASDAQ, since large negative divergences had taken place between the Index and several breadth measures. Now that a part of the implied downside potential has been realized and some positive divergences have appeared, it may be time to look north again. None of this matters, though, until that daily close down trend line for the NASDAQ can break and hold above the 13,200 level. That said, a lot of long-term technical damage has been done, so any rally is likely to be counter-cyclical in nature or, at best, part of a larger trading range. Unfortunately, those are also the most tricky and deceptive to play.

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.