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Nasdaq leads the way for stock indices

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In terms of over-valuation (or in reality bubble mania in my view) the tech market is the outstanding leader.  Just look at a chart on any of the FAANG stocks since 2009 and calculate how much a £1,000 investment would be worth to you now...  Eye-watering stuff, especially if you missed it.  Pundits have been obsessed with justifying the frankly outlandish PE ratios of tech companies and why "this time it really is different".  All smacks of self delusion to me.

If this truly is going to go down in history as the tech led bubble then watching the Nasdaq for clues of the end of the rally to end all rallies must be the way to go.  Looking at the monthly chart I see a couple of nice tramlines developing (albeit that the top one is heavily reliant on prior pivots (but that is to be expected in such a sharp, exponential, rally).  The Weekly chart shows a nice classic progression of Elliot wave counts, parallel tramlines and flag/pennant formations.  Crucially the Pennant, which very often forms at the halfway point in a rally, is signaling a rally end point of 7800-7900.  However in such a strong Bull run we might expect an overshoot of this and the magic 8000 beckons to the markets psychology.

If we look at the Daily chart we also see a Pennant formation after the W4 [Pink] bottom.  This indicates the end of the rally in the 8000 area (but nothing is so perfect and an overshoot of some several 100 points could ensue - although it would most likely be in an exhaustion spike formation (large pin bar) - if it is the end).   My EW count currently suggests we will see a top around 7800 in the coming weeks that will herald a retrace before a final rally to the magic 8000 zone.  Note also in all the charts a significant negative divergence on momentum building steadily.

The 4 hour chart shows a potential breakout of a short term rally flag formation on Friday (to be confirmed with a fresh high), which if it breaks the red line of the previous all time high, will confirm that the market is heading towards the 7800 mark in the short term, maybe set to turn on US NFP next Friday?  Not you can see similar on the other US markets and the FTSE100, which is in a stronger rally phase than the US markets just now. 

The purpose here is not to catch the top but to recognise is has been posted so we can trade secure in the knowledge that the long term direction is down.  I will be looking for all of the major indices to top together and a rally to begin in USD (EUR/USD and GBP/USD to turn and drop) in or around the same time frame.  Notably Gold and Silver may already be showing signs of a rally breakout that may be a sign that market top jitters are gathering.  I will also be watching for the end of the current high grade copper rally as a signal of indices tops. 

I am long the Nasdaq from the Pink W4 and looking to cash in as we approach the 7800 mark and seek a short off the NFP release if conditions allow.  After that, well let's see how price evolves.

 

Thoughts anyone?

 

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@Mercury, the charts have opened no problem, there is an added bonus for pics with the new forum platform, when you click on them a second time they will open up in a new page and at even greater magnification so a lot easier to see in detail and you can move on through the post at the same time. 

Good to see you are still not skimping on the key strikes, will take me a while to read and digest the text but thought to let you know the charts came up fine straight away.

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Whoo!  As I posted my FTSE100 item just now the FTSE jumped up, not yet out of the woods but encouraging.  On the Nasdaq it looks like a turn, as expected, after the price gap close and coincident with the Pennant breakout point.  Let's see if this now triggers a rally in indices.  Similar happening on SP500.

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Big jump in Dax too, Junckers is on the wires giving it the yes but no Brexit deal routine, Dax has already returned to where it started after a 60 tick spike up.

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So I have a slightly revised pair of tram-lines on the Daily chart (dark blue) and a touch at W4 (blue) to complete the 3-4 retrace with a pin bar jump away yesterday and a continuation today.  On the 1 hour I can see a small 1-2 retrace on PMD and positive moves out of over sold on Stochastic and RSI.  A break of near term resistance would be encouraging, as is the rally across the board (other indices, EURUSD, Gold etc).

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Hard to call stock indices at present but still valid to work out scenarios to help light the way, if price action follows...

Also hard to contemplate a rally in the face of so much red ink but that is when they typically happen.  I'm not a fan of catching the falling knife but when there is a turn at a pre-identified level and a confirmed turn and break of resistance that fits a pre-identified road-map that gives me confidence to trade.

The Nikkei is still falling and making fresh lows, I wonder whether the support around 21,000 will be enough to halt this Bear move?

The Nasdaq is my preferred bell-weather these days as I feel this particular Bull phase is tech led (albeit totally central bank fueled...)

Looking at the Daily chart for Tech then I see a critical support level around the 6,800 level (curiously 6,800 has been important for the FTSE too...).  This is also where the Fib 62% retrace level is.  I have PMD on all charts from Daily to 1 hourly (not yet confirmed with an active turn!).

I see 3 possible scenarios:

  1. The market continues to hammer down
  2. We see a consolidation period in a Flag type formation at halfway to the conclusion of this bearish move (that would be around 6,000 level) after which there is a relief rally that retraces perhaps back to the Fib 62% level but who knows at this point.
  3. The Bear move is stopped here, turns out to be a 3-4 retrace and we get a final rally leg up to the top of the market.

Another interesting , if irrelevant, point is that the last 2 corrections dropped approximately 12.5% and we are now at 12.5%.  So I think this level is important.  Alas if we do get a rally we cannot know whether it is #2 or 3 at this point.

Looking at the 4 hourly chart for more insight I found a Triangle formation, which could be tracing out a rally ending pattern (the red a-e labels).  Whether this hold or not the trading options occur only when there is a confirmed breakout from the Triangle for me (always accepting that you can get false breakouts...  Nothing easy in trading!).  I do see these Triangles on most of the other main stock indices and will be watching all of them with interest as Friday progresses into next week.

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So looks like we did indeed get a reversal rally away from the bottom of the Triangle, with a small overshoot of the Fib 62% and prompt recovery back to the right side of that line.  Added to this the daily candle is both a pin bar and spinning top, which is indicative of a trend reversal.  On the Hourly we could see another leg lower to bring up a more obvious A-B-C retrace and possibly a close retest of the Lows from Friday before a strong rally away.  If we get this and a strong breakout of the Triangle the the red line scenario for a new all time high and market top is back on.

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There are 2 possible scenarios in play on the Weekly Chart long term horizon for the Nasdaq.

  1. Market has topped out already and broken through a key long term trend-line support.  Might get a retest of this support but essentially the only way is down from here...
  2. Market has not yet topped out and bounced off a long term trend-line and will rally back significantly from here.  In fact there is a third scenario where by the rally will be a retrace that will turn before the previous all time high and then plummet through the supporting trend-line.

Just goes to show that interpretation is key to technical analysis (there is no fool proof system).  Also it is vital to search exhaustively for alternative scenarios and assess the likeliness of each, keeping your bias in mind.

My bias is Bearish, and has been for some time, but I think there is still a final leg up to go on this Bull.  I have 2 versions of weekly charts, one for each scenario.  The key different is the positioning of the set of parallel tram-lines (Purple for #2; grey for #1).  For #1 the lower line has confirmed turning points, whereas for #2 the recent turning point is not yet confirmed (requires a strong rally away and maybe a retest prior to this.  However the upper line has better touches in #2 than #1 for me.  In addition the upper line on #2 intersects the psychological 8000 level around US NFP time, which could also be pivotal.  We should know soon, probably through next week to US NFP but as of yet we cannot know if any rally now will be a retrace or produce a fresh all time high.

Trading strategy:

Given the levels of uncertainty and that this market offers a similar pointage to some FX pairs at present I am inclined to stick to USD pairs and await events on stocks before deciding on where to start a Shorting campaign that could turn out to be one of the largest in living memory.

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Big moment for stock indices coming up I think.  Will US open drive stocks through the upper Triangle line in a firm Bullish breakout of retrace back within the Triangle?  I already have a nice retrace on the Nasdaq to the Fib 62%, although until we get that firm breakout nothing is set.  This could also be pivotal for USD and precious metals...NASDAQ-4-hours_271018.thumb.png.a59c0fbbab8739dd33e15d9359902cff.pngNASDAQ-1-hour_271018.thumb.png.3d65a206c51ca0ce6290dcec2a868d4d.png

 

 

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Nasdaq remains the leader for stocks for me, despite SP500 being much bigger.  SP500 is a related index with significant tech stocks also but if there is one index to look at to signal the next "Big Short" it has to be the Nasdaq, which I don't trade Long BTW, because of its volatility as we near the end game, I just use it to light the way.

So yesterday produce a drop that for a moment made me doubt myself and almost jump in on the Bear!  A nagging feeling that we had seen this before (and got burned) prevented that, well we hadn't had a close below my Triangle line, which is one of my trading rule.  This time it prevented me from getting caught in a Bear trap, and what a trap!

The Triangles across all indices have held, despite the hard test, and the FTSE breakout and retest is, I think, particularly Bullish.  Overnight the Nikkei also saw this as bullish and tallied away from the support zone.  A small retrace and maybe retest of the Triangle support zones would be ideal to set up a rally phase.  I also have nice PMD on the 4 hourly chart.  At this point it is impossible to judge whether this will be a final leg up for the Central Bank Bull or just a relief rally preparatory for the big drop.  However it is noteworthy I think that the Nasdaq price action has remained inside the weekly chart channel.  I feel that only a strong confirmed break of this channel would signal the Bull is dead.

Trading strategy:

  1. My assumption is Longs only short term, but this would be changed if support is broken on retest.
  2. I will be looking for a suitable short term retest and rally to go long but have to guard against another hard retest as per yesterday
  3. Alternatively, and perhaps in addition, a breakout of the upper Triangle line is another good trading point
  4. I will be looking closely at the FTSE, which has already broken out and retested its Triangle, for a trading opportunity and maybe also the Nikkei rather than US markets.  If I can get in on a rally early before US open I can set stops to protect a re-occurrence of yesterday, which incidentally is exactly what I did yesterday.

Anyone see it differently?

 

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Looks like the Nasdaq has completed a retrace to the breakout zone (and Fib 50%) and is now rallying away strongly.  Not much ST resistance until the Friday morning high.  PMD at the turn zone and EW count is good.  Interestingly the large Caps are more buoyant, turning around the Fib 38% after all.  Need to see a break through resistance overhead to confirm another bullish phase but the movements appear strong to me, more like another higher high type move that a retrace, early days though, let's see.

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Nasdaq about to test the long term supporting trend-line again.  Could get a spike through like 29 Oct but I doubt it will be that dramatic this time (unless it is a serious high volume breakout).  With strong PMD and EWT count positive a relief rally is indicated.  One to watch for an either way move of this important level on the US open I feel.

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The Spike low on opening will have cleared out all the Uber Bears, who forgot that markets move in waves (up, down, up, down) and price is now knocking on the door of the Triangle.  A break here will almost certainly result in a retest EW1-2 retrace before a further rally.  We may also get the 1-2 within the Triangle before a more powerful breakout in wave 3.

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There's the 1-2 retest and jump away, you can see it on the other US large caps as a retrace to the Fib 50%.  Strong move so far, will be interesting to now see how the price action unfolds...

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