The NASDAQ Composite Index made an all time record high last week. At the same time the S&P 500 Index is about 10% off its February 2020 high and the and the Dow Jones Industrial Average is about 15% off its high this year.
But take a look at the Relative Strength Index on the weekly NASDAQ chart. While the Composite made a new high the RSI did not. In fact, the RSI is moving lower. This is called a bearish divergence. Bearish technical divergences often precede reversals in price, or in this case of the index.
We took a look at the daily NASDAQ chart last week. We noted that the rally off the March low began with a bullish morningstar pattern and that now a bearish eveningstar pattern had formed on this time frame. The morningstar and the eveningstar look like perfect bookends to the start and the potential end of the three month rally. In addition, the NASDAQ closed out last week at the lower end of its candle range and is sitting tenuously on the uptrend line on the daily chart that defines the recent rally.
So, what we have is the Composite Index which has led the broader market higher, forming a bearish eveningstar reversal pattern right at a critical support level on its daily chart. In addition, a very pronounced bearish divergence between the Composite reading and the Relative Strength Index has developed on the weekly time frame.
This is multiple time frame confirmation of a deteriorating technical condition in the market leading technology NASDAQ Index. Be very cautious despite the strong Monday morning open.