Nasdaq Divergence
In my After Further Review piece, I introduced the 'T Theory" concept developed by Terry Laundry (http://ttheory.typepad.com/) and showed that the Nasdaq was on track to rally into August 8. The Nasdaq rally was so strong that it actually made its high August 11 in the momentum oscillator and is now showing signs of fatigue. I am posting the same Nasdaq chart with updated prices and momentum oscillator. I have also included the 14 period RSI to show how the momentum oscillator can catch divergences missed by the RSI.
Again - I apologize for the horrible condition of the charts, but let's take a look at the far left side of the chart in the middle pane, which is early October 2007. Notice the small red trendline (circled) connecting descending tops in the oscillator from October 5 - 10. In the pane just below, notice how the 14 period RSI did not show any divergences as it made a high with the price action on October 10. The momentum oscillator caught weakness as measured by Nasdaq market internals that was missed by straight price momentum as shown by the RSI. Following the divergence, the index sold off sharply into October 22, with a final, exhaustive push to new highs on October 31. At that point BOTH the Nasdaq momentum oscillator AND the 14 period RSI showed a major divergence as they were nowhere near their previous highs. Thus began the current bear market.
Now fast forward to August 15, 2008. There you see circled in the middle pane at the right side of the chart the same divergence today. This rally has come very far, very fast (a common trait of bear market rallies). Recall that we also have time cycles lining up in some of the other indices pointing to August 18 - 19 as a prime area for a reversal lower. Also as of today technicians are still checking the NYSE Composite Index for some semblance of a pulse. This does not mean, however, that we guess and throw on a bunch of short positions here, but it does tell us to be ready to act if we see a solid reversal. When patterns like this back up analysis in other indices or markets, it gives us more confidence that a reversal pattern is the real deal and not a head fake. Let's see how trading unfolds early next week.
BTW - those of you who use Connie Brown's method of RSI momentum sell signals will see that this chart shows a downside target of 2147 on the Nasdaq Composite. We can also use 'T' theory techniques to project a time target for a bottom. As of this point (barring further advances in the Nasdaq), the time frame for this decline to end would be around Monday, September 15. So we are looking for a decline to at least 2147 in the Nasdaq by September 15 if things head south from here. Could that mark the bottom of this selloff since last October? Time will tell.
Again - I apologize for the horrible condition of the charts, but let's take a look at the far left side of the chart in the middle pane, which is early October 2007. Notice the small red trendline (circled) connecting descending tops in the oscillator from October 5 - 10. In the pane just below, notice how the 14 period RSI did not show any divergences as it made a high with the price action on October 10. The momentum oscillator caught weakness as measured by Nasdaq market internals that was missed by straight price momentum as shown by the RSI. Following the divergence, the index sold off sharply into October 22, with a final, exhaustive push to new highs on October 31. At that point BOTH the Nasdaq momentum oscillator AND the 14 period RSI showed a major divergence as they were nowhere near their previous highs. Thus began the current bear market.
Now fast forward to August 15, 2008. There you see circled in the middle pane at the right side of the chart the same divergence today. This rally has come very far, very fast (a common trait of bear market rallies). Recall that we also have time cycles lining up in some of the other indices pointing to August 18 - 19 as a prime area for a reversal lower. Also as of today technicians are still checking the NYSE Composite Index for some semblance of a pulse. This does not mean, however, that we guess and throw on a bunch of short positions here, but it does tell us to be ready to act if we see a solid reversal. When patterns like this back up analysis in other indices or markets, it gives us more confidence that a reversal pattern is the real deal and not a head fake. Let's see how trading unfolds early next week.
BTW - those of you who use Connie Brown's method of RSI momentum sell signals will see that this chart shows a downside target of 2147 on the Nasdaq Composite. We can also use 'T' theory techniques to project a time target for a bottom. As of this point (barring further advances in the Nasdaq), the time frame for this decline to end would be around Monday, September 15. So we are looking for a decline to at least 2147 in the Nasdaq by September 15 if things head south from here. Could that mark the bottom of this selloff since last October? Time will tell.
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