Brandon Wendell, CMT
Brandon Wendell
Last week I discussed the method we can use to chart the four major indexes and determine which one is leading the equity markets in the current direction. The reason behind this technique is to help predict the major turning points in price that will affect our trading.
In the recent market rise, the Dow and S&P indexes have been enjoying new highs and therefore do not have any overhead supply to indicate where the top could be. However they are not really leading the markets. Looking at the following chart, you can see that the Nasdaq 100 index has been the strongest and is leading the others.
Notice how the QQQ (the Nasdaq 100 ETF) has been the strongest out of the four? This shows that it is the leader in this upward trend and should be the one to indicate when trend will change. The fact that it is diverging (moving further away from the others) is also an indication of potential trend change coming.
In order to establish where prices may reverse, we need to look back in time to find the QQQ’s supply zone. Back in 2000, the QQQ formed a few daily and weekly supply zones that may offer turning points for us in this current market environment. It doesn’t seem like it will work, but I used the same method to trade the drop in the indexes in February to April of this year.
Another interesting note is that the same pattern developed before the market collapse in 2008. The Nasdaq 100 was the leading index. The index turned downward from its high in October 2007 after leading the market charge higher and the collapse began.
Another noteworthy event is the price action of the Russell 2000 index in both the 2007 market peak and also in the current market environment. In both instances the Russell showed weakness well before the other markets peaked. The Russell 2000 peaked in July 2000, not October like the large cap indexes did.
The reason I am concerned about this index is that it is comprised of small cap companies that generally do not have international exposure for their business. Without the international income, they are more responsive to changes in the United States economy and can be a better barometer for the health of our US economy and markets. When this index is ill, it is a bad omen for the stock market as a whole.
The Russell made all time highs in early July but has been weak since. Fortunately for the bulls the IWM has recently bounced from a daily demand zone. If it can make new highs, this could signal the bullish trend still has life. But if we instead make a lower high and lower low, the trend has changes and the bears may be growling.
So while it is not an exact science, we can use this technique of market comparison to increase our chances for success in our trading and investing. Come join us in the Extended Learning Track at Online Trading Academy to hear the latest analysis on the broad markets and individual securities. Hearing and learning educational information could be the most valuable thing you can do for your portfolio.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD climbs to daily highs near 1.1820
EUR/USD now picks up pace and advances to the area of daily peaks north of the 1.1800 barrier at the end of the week. The pair’s decent move higher comes against the backdrop of a generalised lack of direction in the FX galaxy and the mild offered stance in the US Dollar.
GBP/USD trims losses, retests 1.3460
After briefly challenging its key 200-day SMA near 1.3440, GBP/USD now manages to regain some balance and revisit the 1.3460 zone on Friday. Cable’s pullback comes as the selling pressure on the Greenback gathers traction, reigniting some recovery in the risk-linked space.
Japanese Yen gives back half of early gains against USD ahead of US PPI data
The Japanese Yen (JPY) surrenders half of its early gains against the US Dollar (USD) during the European trading session on Friday. The USD/JPY pair rebounds to near 155.90 as the JPY falls back, but is still 0.15% down.
Editors’ Picks
EUR/USD: Fed calm, ECB steady, but the Dollar still leads Premium
EUR/USD is still struggling to find real traction. The pair has tried to stabilise, but momentum keeps fading, leaving the door open to further weakness.
Gold: Falling US yields, geopolitics help XAU/USD hold ground Premium
Gold (XAU/USD) gained traction and climbed above $5,200, ending the fourth consecutive week in positive territory. The next round of US-Iran talks and crucial macroeconomic data releases from the US will be watched closely by market participants in the short term.
GBP/USD: Will Pound Sterling defend key 1.3450 support ahead of US jobs data? Premium
The Pound Sterling (GBP) entered a bearish consolidation phase against the US Dollar (USD), after having tested critical support near the 1.3450 level on several occasions.
Bitcoin: Another month of losses, and it’s been five
Bitcoin (BTC) price is stabilizing around $68,000 at the time of writing on Friday, but the Crypto King is poised to close February on a fragile footing, marking its fifth consecutive month of losses since October and a rare start to the year with back-to-back monthly corrections.
US Dollar: At a crossroads; Fed steady, tariffs in flux Premium
The US Dollar’s (USD) upward momentum from the previous week seems to have encountered a tough nut to crack in the 98.00 region, as measured by the US Dollar Index (DXY).
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