Equities Setting Up to Finally Crack
Last week’s fresh highs on the S&P 500 and Nasdaq Composite were printed with increasingly weak underlying participation.
As evidence, consider the New York Stock Exchange Advance / Decline Line (cumulative), or “NYAD.”
For reference, the NYAD captures the net difference between advancing and declining issues, as a type of breadth measure. It is usually compared to a major index, where a divergence from that average would be an early indication of a possible trend reversal.
Applied to the current market, note that NYAD clearly negatively diverged last week from the S&P and Nasdaq, with respect to advance-decliners well below recent highs.
In addition, our ongoing analysis of the diverging small market capitalization stocks housed in the Russell 2000 Index has been fruitful insofar as understanding the underlying weakness in many parts of a market which, on its face, appears to be hitting fresh highs in unison.
This understanding has enabled traders to maintain modest expectations and not become frustrated by the illusion of “missing out.”
As evidence, consider the updated daily Russell chart. Note the weakness on Friday (yellow arrows), with sellers dominating the trading session from bell to bell, indicated with the large bearish “marubozu” candlestick. Moreover, the Russell still has not made fresh highs since the summer, clearly diverging from the senior indices, as price closed below all major daily chart moving averages.
A move over 1,180 and especially 1,213 would be what bulls want to see to negate any bearish divergences, while bears are pressing for an imminent breakdown. A close below 1,082 would confirm a multi-year topping pattern and presage a steep correction or bear market.
Another “tell” we have been tracking is Tesla, a bonafide marquee, momentum leader in the market for a while now. The weekly chart “shooting star” candlestick (yellow arrows) we have been following began to asset itself last week, as Tesla weakened further. True, the stock is still in an overall uptrend.
But this momentum leader is hardly leading while the Nasdaq and S&P made new highs last week.
Again, this type of analysis should serve to at least temper expectations of traders who may become frustrated by seeing the senior indices hit fresh highs, as the action underneath the surface remains subdued.