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Some near-term negative divergence in NASDAQ-100

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The "outward appearance" of the NASDAQ-100 (NDX.X) and the NASDAQ-100 Trust (QQQ) sure look strong. Both recently just broke above their 200-day moving averages. Yet the internal supply/demand has not yet confirmed that the internals are as strong. This is a hint that we are most likely seeing a few of the BIGGER stocks making up most of the gains for this narrower technology based part of the market and equity bulls need to be cautious and still rather eager to take profits on a near-term basis.

NASDAQ-100 Bullish % chart - 2% box

As of yesterday's close, 78% (78 of the 100 stocks) of the NASDAQ-100 stocks currently traded on a point/figure buy signal. This matches a level of bullishness seen in late November, but not exceeded. This type of "inability" is a very short-term observation that the internals aren't confirming the price action we've seen in the NASDAQ-100 Index (NDX.X) or the weighted QQQ. Subscribers know that the bullish percent is not weighted. Each stock's chart gets one vote. Either "buy signal" or "sell signal" to help us understand risk and bullishness/bearishness. Right now the bullish% reading would be that of "bull confirmed," but also "overbought." Levels above 70% bullish are considered overbought.

NASDAQ-100 Trust (QQQ) -

With the NASDAQ-100 bullish percent still in "overbought" territory and not confirming the recent price action in the QQQ, I could envision a pullback to the $36.50-$39 range. But this doesn't mean it's time to take my toys and go home. It's simply a time to take some profits in those stocks that are overextended and perhaps set up the "weak sisters" for a sell signal in the upward trend.

NASDAQ-100 Trust (QQQ) chart -

By looking at the retracement bracket on my bar chart and bringing in the point and figure chart, I can perhaps envision a "first sell signal in the upward trend" and a potential buying opportunity on a reversal. A 4-box reversal would take my point/figure chart down to $39, right near retracement on the bar chart. Get a little rally and a 3-box reversal higher to $42, just a smidge above retracement at $41.98, then get the "non believers" out of the way with a sell signal at $38. Perhaps by then, we've got some good sell signals in some NASDAQ-100 stocks too! That would bring down the bullish percent chart reading also wouldn't it? We can follow this going forward. We can also use it to be looking for stocks where we can use our relative strength chart. That's one of the "problems" with trading the QQQ or the NASDAQ-100. What do we test RS against? We could use the SPX as the test for RS, but I like using RS on stocks vs. Index seems to work better.

I also hope subscribers say "Jeff... the QQQ gave a sell signal in the upward trend back in late June (just before red 7). That's a fantastic observation! What were bond YIELDS doing then in the 10-year? What are they doing now? What will they be doing in a week or two? This is why it is so important to also be monitoring the bond market going forward! In late June, bond YIELDS started heading back lower and there was little cash coming into the market. A trader that "blindly" traded the "first sell signal in the upward trend" without monitoring the bond market action would have gotten stopped out with a loss at $41 back in July.

Jeff Bailey
Senior Market Technician
Option Investor

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