One of the most important and perhaps rewarding things a trader can do is observe deviation in pattern from the past. Traders look to capitalize on reoccurring patterns they see develop in the markets and play those patterns as long as they continue. Eventually, those patterns will reverse themselves and give hint that things are changing. Yesterday, the bullish percent for the NASDAQ-100 was able to actually reverse back into a column of X's from a high level. This is a BIG change in past pattern and should be noted.
Bullish Percent for NASDAQ-100 - 2% scale
The above chart of the Bullish Percent for the NDX from www.stockcharts.com ($BPNDX) tells us two important things. One is that the NDX is once again in a quantitative "overbought" mode. The second and perhaps most important is that this index is showing some strength that we haven't seen since September of 2000. Notice how in the past that a reading above the 70% level when reversed into a column of O's saw this indicator plummet below the 30% level and then consolidate below or around the 30% level. Yesterday, this indicator actually reversed back above the 70% level, thus major deviation from past history. This is very important for a trader and investor to pick up on. I make note of this "consolidation" today and now expect the following. If (I stress if) the bullish percent for the NDX were to reach a level below or near the 30% level, I'd look for a quick reversal from that level with little consolidation. My thinking is "if I'm seeing deviation of pattern at this current high level, then I'd expect deviation of pattern that a low level." Pattern recognition and DEVIATION of past pattern or events is very important for traders to pick up on. Remember that the bullish percent doesn't tell us much about overall index direction, but tells us a lot about sector/index strength and risk.
An observation from a subscriber
I usually don't display or follow the 100-day MA on the charts I display for readers. I normally just show the 50-day and 200-day MA's on the daily interval chart. Subscribers will remember a recent update I did that discussed levels to be monitoring for the S&P 500 as resistance. In that article I talked about horizontal resistance on the SPX at the 1,272 level and relative high from 02/27/01. Yesterday a subscriber felt that the 100-day MA at 1,267 was the reason for the SPX to stall at 1,269. A very good observation and perhaps two technical items on the SPX that say this index might see some selling.
S&P 500 Index Chart - last eleven months
I've always felt if you get too many moving averages or stochastics on your chart it's easy to get conflicting signals and then confusion sets in. Currently, I'd say any shorting/putting of the SPX should be followed with a stop just above 1,272. You can see how it does look like the 100-day MA could have been a target for bulls to lock in some profits. Support for the SPX looks to be the 1,183 or 1,200 level. Just as we saw a "change in pattern" in the above SPX chart when it was able to break above the 1,183 level (a relative high) we're now seeing a "change in pattern" on the bullish percent for the NDX. Both changes have been a sign of strength and should give us confidence to buy a pullback should one occur.