Saturday, September 17, 2011

Fibonacci, resistance and bad breadth dog the Nasdaq and broad markets in a big way

Here's a deeper look at the resistance that I recently mentioned the equity markets are running into right now. Fibonacci resistance warns to be very alert, and breadth and strength indicators are concerning too; so here are four charts to review. I've chosen the Nasdaq, although other sectors as well as the broad markets are displaying similar resistance characteristics, because the Nasdaq tends to be (a) stronger in the good times, and (b) a precursor of where the rest of the stock markets are heading. Let's start with QQQ, the ETF for the Nasdaq 100 index ($NDX), and the $NDX monthly chart.

On the daily chart of QQQ below I've marked not only the trendlines of the rising bearish flag that many are noting for not only this index but many others (consumer discretionary, crude oil - many items), but also the main Fibonacci retracement levels from the top to the drop. The QQQ tested the 38.2%, the 50%, and now the 61.8%. It's likely testing the 70.7% as part of overshooting the 61.8%. What this means is that the next daily bar that moves under, and preferably closes under, the low of the prior day, has a high probability of being a swing (or even position) sell signal.

It's especially concerning because the 61.8% retrace is often a second-wave level where price turns and goes into a third wave well exceeding the first. It's also interesting that the $SPX has moved up almost 90 points which is often sufficient to cap a major move in that index. Moving under the flag's lower trendline would confirm and accelerate another wave lower. We'll take this very seriously (KI$$ investors, pay attention!) especially in this bad breadth environment.

The breadth charts are further below. First look at the QQQ chart, then the monthly $NDX - including the huge selling volume in August. That massive selling volume plays a big role in the bearish technicals.

Meanwhile, the bad breadth is showing up in various market internal strength indicators. What's especially concerning is that, despite the shorter-term fluctuations showing up in the McClellan Oscillator and $TRIN, the bigger-picture indicators reveal much weakness. Check out these two charts of the cumulative new highs minus new lows (i.e., net new highs) in the Nasdaq Composite ($NAHL), short-term and for the past three years. These reveal that, while some companies like Apple are showing good relative strength, the index at large is very weak. This breadth indicator continues to plumb underneath its own Bollinger Band midline, as well as its shorter-term 10-day moving average. The relative number of lows continues to dog this index and act as a downward drag. This can very much be consistent with the concept that the big trend is now down until longer-term cycles bottom over the next couple of years.

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