What’s inside:
- Glaring divergence among major US indices
- Nasdaq 100 carving out a head-and-shoulders top, but no trigger yet as support has yet to break
- Will the SP 500 follow the Dow and Russell 2000 or the Nasdaq
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In recent sessions, we have seen significant divergence among the US indices. The Dow and Russell 2000 (small-caps) have risen to record heights, while the Nasdaq 100 has been trading back towards its worst levels of the month. The SP 500 is holding in between.
The divergence is glaring and providing mixed signaling. Generally speaking, negative divergence among indices during an up-move is not a sign of a healthy market. But at the end of the day, though, price action in the SP 500 is generally what matters the most given the index’s broad representation of large-cap stocks. However, divergence does beg the question: Will the SP follow the way of the Dow and Russell and play catchup, or is the Nasdaq flashing a warning sign of things to come?
Intermarket divergence
Created with Tradingview
Let’s take a look at the Nasdaq 100 since it is providing the clearest technical formation. The 100 is in the process of carving out a head-and-shoulders pattern, and should it trigger its neckline it is likely the Dow and Russell will quickly reverse and the SP 500 will rollover as well. Conversely, the neckline could hold, as it is still considered support until broken, and the HS formation will never come to fruition. If this is the case, then we may very well see a rotation into the tech-heavy index and the SP. It’s all dependent on how things play out with the neckline.
Nasdaq 100: Daily
Created with Tradingview
SP 500 levels and lines…
SP 500: Daily
Created with Tradingview
All-in-all, we will want to keep an eye on the Nasdaq as it’s quickly closing in on the danger zone. How it handles neckline support will likely prove a critical sign of which way the next broad market move wants to unfold. We’ll update shortly as market develops unfold. Join me tomorrow at 9 GMT for a look at short-term charts and potential trade set-ups.
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—Written by Paul Robinson, Market Analyst
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