Author Archives: Rob Moreno

“There is no S&P 500 index anymore.” Here’s Why.

“Chart Master” Carter Worth checks out the concentration of capital issue in the S&P 500 index. This overweighting problem is why, when traders finally try to rebalance out of the tech high-flyers (that could happen) the whole market will suffer.

The DOW : Monday’s Focus Was On Breaking Through Resistance – On Tuesday The Focus Is On Holding Support

Yesterday we took a look at the Dow Jones Industrial Average chart. The primary focus was on the trend line resistance level situated in the 26,426 area which is being reinforced by the horizontally tracking 200 day moving average. A strong open suggested that the Dow was set to break above resistance and potentially move up to close the island gap. See the post here.

But the follow up to the open on Monday was flat and only accelerated a bit at the close. The resistance line held. Today’s open will be lower and we will see if there is downside follow through during the session or the move fades. In any case, it would be prudent to do the exact opposite of what we did on Monday morning, that is take a look at areas of support on the indices.

The chart shows the Dow Jones Average with the island still floating unattached above horizontal resistance. As we said that resistance was tested on Monday but held. Back down in the 25,000 level is a confluence of support. It consists of two intersecting trend lines and the 50 day moving average. It is a long way back down to that area but it is good to know its there.

On the S&P 500 chart, the similar support area includes multiple trend line support, the 50 day moving average and the 200 day moving average. If the index were to revisit that area, a bounce might be in the cards.

Powerful Market Open Today Propels the Indices To Important Technical Levels On The Charts

Resistance on the Dow Jones Industrial Average daily chart for the last month has been defined by the 200 day moving average, currently situated at 26,254 level. It should be tested right at the open this morning. If this resistance is broken the assumption would be that the next upside target would be closing the island gap created earlier in June. That would be a major step in initiating a credible run at new highs.

The Volatility Index weakened for most of the month of June. Last week the 200 day moving average was tested. That average has been running along with a horizontal support line. Together they compromise a double level of support situated along the 26-25 level. That area will come under heavy pressure at the open today. The collapse of volatility is an all-clear sign for the bulls.

The NASDAQ Composite chart is a thing of beauty. It continues its lower left to upper right climb (remember that one, I miss Gartman) within its upper Bollinger Band range. The only negative about this chart is its relative performance to the broader market, in this case the S&P 500 index. It’s too good. The NASDAQ is outperforming the S&P 500 by about 12.5%. These gains are powered by the tech heavy weighting in the Composite Index. The negative implication is that, at some point in time, NASDAQ performance will revert to the S&P mean and come in.

Regression to a mean is likely over time and looks obvious in retrospect on the chart. It is just hard to time or more correctly impossible to time. That is why traders respect the trend.

So, how will the trading landscape present itself today and later into the week? The futures are telling us the week will begin with a bang, that’s the easy part. But will the move gain traction or whimper out? and will volatility continue to contract? I don’t know. If you are comfortably invested my suggestion is to continue to ride the trend and look for levels to tighten trailing stops. If you are less invested that you want to be, don’t use this strength to add more exposure. There will be pullbacks and opportunities to add incrementally. Be patient.

Caution! – NASDAQ Composite Chart – Bearish On Multiple Time Frames

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.

S&P 500: Watch These Levels On The Weekly Close

The feeble but positive bounce on the daily charts of the major market stock indices on Thursday created individual doji candles on their weekly charts. A doji as we all know is a closing print at or near the opening price of a stock. Thursday’s session finished right about where the indices opened on Monday.

With the Friday open suggesting we could see another volatile session, the weekly candle formation could be more important than normal.

The chart shows the Thursday close on the weekly S&P chart. It is just about dead center of the weekly range and equal with the Monday open. It could, of course, close anywhere within that range but let’s look at three possibilities. If any one of those were to happen it would have particular technical implications for the current rend.

The first is that the S&P, after exploring different level returns to exactly where it is. It forms a doji. In this case, it would suggest uncertainty without any directional bias. If the market moved down during the day and closed at its lower weekly range the black candle that would form would be similar to a shooting star (illustrated). It is often a topping candle. Two weeks ago a large red bearish engulfing candle formed and together these two bearish candles would have a negative gravitational pull on the market. If the weekly close was near its upper range it would form a red hammer-like candle. A hammer is a bullish candle and its formation on a major moving average is even more positive.

So, watch the weekly candles. If you are unconvinced one way or the other by their formation or my analysis then don’t do anything. We’ll come in cold on Monday and reassess.

The NASDAQ Composite: It’s Outperformance Could Be A Bad Sign

The 700 point drop in the Dow Jones Industrial Average on Wednesday took some people by surprise. Stocks can actually go down despite what Dave says. But seriously, it is a good time to take a look at the status of the index charts and get a feel for what they are trying to tell us.

The daily Dow chart shows the text book four month stair-step rally. It began in late March with the formation of a morningstar candle pattern and has climbed back up to its horizontally trending 200 day moving average. If, in fact, it turns out that the Dow has made a top of some duration then the island grouping of four stock made earlier this month may have been a sign. Island reversals are considered important technical indications.

Over the last two weeks the industrial average has been trading in a 1000 point channel range. Topside resistance is being supplied by the 200 day moving average and support by an intersection of trend lines and the 50 day moving average. During this two week period the relative strength index has dropped below its 21 day average and its center line. This suggests a loss of positive price momentum. Chaikin money flow moved below its signal average and is heading lowering, reflecting a loss in positive money flow.

So, on one hand, the Dow average is losing some of its positive momentum, but on the other hand, there is reinforced support in the 25000 area which could be a platform for a bounce.

The action on the S&P 500 daily chart has been playing out very much like that of the Dow chart and the technical picture is about the same. It’s the NASDAQ Composite chart that requires the most attention.

The daily NASDAQ chart shows the composite index climbing steadily off its March low above a strong rising trend line. It began with a bullish morningstar pattern and now, just this week a bearish eveningstar pattern has formed on this time frame. The positive technical take-ways are that the rally has taken place within the confines of the upper Bollinger bands, as well as the strong uptrend line, and the price and money flow momentum indicators look stronger than their Dow counterparts.

But the NASDAQ Composite chart is particularity important to watch because of its leadership role. The indicator at the bottom of the daily chart measures the percent difference in the performance between the NASDAQ and the S&P 500 over the charted period. We all knew that the Composite index was making new all time highs and that the other major market indices were lagging well behind. The graph at the bottom of the chart shows that since March the Nasdaq index has outperformed the S&P by nearly 13%. This diversion between the broader market and the NASDAQ composite cannot be sustained. The averages will return to a more natural alignment. This has the effect of the broader market pulling down the tech heavy NASDAQ. This then reinforces the weakness we see on the Dow and the S&P charts, and there is a sudden and swift correlated pullback.

The bottom line is that five large technology stocks cannot support this market forever. They will yield under the weight of their own market cap and take down a vulnerable looking broader market with them.

Critical Event Management Stock Poised To Move Higher

Everbridge (EVBG) is a software company located outside Boston. It’s platform and software applications address critical event management and it serves enterprises and government agencies. Here’s a link to an interview with the commpany’s CEO and a description of their “Covid-19 Shield.”

The daily chart shows the stock price consolidating this month in a rising channel above a rising tend line that goes back to April.

In trading on Tuesday, Everbridge shares attempted to break through a zone of resistance located just below the $140 level. It closed near the high of the day suggesting at least another attempt to penetrate the resistance area. The relative strength index is crossing above its 21 day moving average and centerline. This reflects improving positive price momentum. Chaikin money flow is crossing into positive territory suggestive of improving money flow.

The technicals point to a stock that is poised to move higher and the 14% short interest could initiate some covering.

Another Bearish Divergence – Like We Saw In February – Just Before The March Drop

Back in February this year my technical take on the market was featured on an “Off the Charts” segment of Mad Money. I noted that there was an interesting bearish divergence going on between the S&P 500 Index and the S&P 500 Equal Weighted Index. The familiar S&P 500 Index is dominated by five major tech stocks which account for about 20% of its weighting. The S&P 500 Equal Weighted Index gives equal weighting to all of the stocks in the index. Consequently, a rally in tech stocks can distort the balance between these two indices even though they are both comprised of the same stocks.

At the time we noted: the S&P Index was breaking above the resistance line of a horizontal channel pattern, while the equal-weighted Index was not. We suggested this was a bearish divergence. That the two indices would have to realign at some point. The higher probability scenario was that the technology stocks were distorting the performance of the S&P 500 index. This would mean that the breakout on the S&P 500 chart was a false breakout and that it would have to revert back in the direction of the equal-weighted chart.

This week the S&P 500 Equal Weighted Index has dropped about 5% while the S&P 500 Index has only dropped about 1.5%. This is action reminiscent of the February bearish divergence. It suggests the S&P 500 Index will have to realign with the S&P 500 Equal Weighted Index. This does not necessarily suggest a pullback of the magnitude we saw in March but be alert. Preserving capital is the prime objective in trading.