Indices Update – NQ leads, TF lags

The Nasdaq Leads

The Nasdaq has rallied about 4% over the old 3740 top so far. It has been 34 days since last touching the 20 day moving average.
The Nasdaq has rallied about 4% over the old 3740 top so far. It has been 34 days since last touching the 20 day moving average.

Mean Reversion 

Everything reverts to the mean. Since climbing above the old top at 3740, the Nasdaq Index (NQ) has climbed exponentially and has hit 3917 so far. It has been 34 days since the NQ last touched the 20 day moving average. Over the past 10 years or so, the most number of days that the NQ has gone without touching the 20 day moving average is 50. So in the next 16 or so trading days we might get a pullback to the 3820-3850 area.

Historical Price Action

The old top in the NQ was 3740. Most rallies over an old top come back to test the old top. The NQ has not done this yet. The drop from 3740 to 3404 in April this year was a 9% drop. The NQ has rallied about 4.7% over the 3740 top so far. Looking back at similar situations in the past, the average peak (3917 so far) over the top (3740), before dropping back to the top is about 8%. An 8% rally over the 3740 top would take NQ near 4000. So history suggests we will climb some more. A conservative 6% climb over the top would take NQ to 3970.

Candlestick Patterns

Currently the NQ is closing near highs for the umpteenth week and there is no good reason to be short this index, when there is a much better index available for shorting:

The Russell 2000 Small Cap Index is Clearly Lagging the S&P500 and Nasdaq

While the S&P and Nasdaq have been soaring to new highs, the Russell 2000 has been unable to make a new high since March 2014.
While the S&P and Nasdaq have been soaring to new highs, the Russell 2000 has been unable to make a new high since March 2014.

The Russell is Ranging

The Russell 2000 (TF) is a much weaker index compared to the Nasdaq and the S&P500. When comparing the NQ and TF charts, the NQ is in a clear uptrend while TF looks range bound. The Russell was especially weak yesterday July 3rd when NQ and ES were making new highs, the Russell couldn’t get anywhere near making  a new high.  The S&P500 and Russell have both mean reverted recently- another sign that indicates they are both weaker than the Nasdaq.

The Russell hasn’t climbed significantly over the old top

The key price level on the Russell is 1181.3. This represents the old top established in January 2014. The second time the Russell climbed above 1181.3 it pulled back- this is common. But the pullback was extreme as the TF fell below the 200 day moving average to the 1078 level. At the same time the Nasdaq and S&P500 both held above their 200 day moving averages.

Speculation

Now the Russell is trading above the 1181.3 level again. While the Nasdaq has climbed 4% over the old top at 3740, the Russell has climbed about 1.6%. I have been waiting for a down week in the Russell to short the index and from the candlestick pattern the Russell may close down this week. In particular I’m looking for it the Russell to pullback to the 1181-1184 level this week. If this happens then it could signal that a bigger drop is going to begin.

And if the Russell were to fall back to 1078 for a third time, that would complete a double top pattern and I think the TF would decline roughly 10% from 1078 down to the 950-1000 level.

Now why of all weeks would the Russell pullback this week? Honestly I’m completely speculating here, but the candlestick pattern over the past two weeks suggests that it may do so.

Let’s see what happens.

 

spychart.net