[Chart Of The Week] Momentum Diverges Negatively At Nasdaq's New High

JC Parets
April 3, 2017

Last week the Nasdaq100 went out at new all-time weekly closing highs. While that might seem like a bullish characteristic on the surface, I think it's important to recognize what is happening within the actual index itself. Like I always try and reiterate, this is not a "stock market", it is a market of stocks. Today we're going to take a look at what is actually going on here.

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[hide_from visible_to="member"]The Nasdaq100 is a Cap-weighted Index, meaning the companies with the largest market capitalization represent the largest percentage of the index itself. In order to see what is actually happening, we want to take a look at the Equally-weighted Nasdaq100, giving all 100 companies equal representation. This allows us to get a much broader look at the index.

Here is the Equally-weighted Nasdaq100 reaching our upside objective in early March. This target is based on the 161.8% extension of the entire 2015-2016 decline. Since then, it's just been a sideways churn:

NDXEww

Looking a little closer, we can see that throughout the month of March, the Equally-weighted Nasdaq100 did make several higher highs on a closing basis after initially reaching our target at the beginning of the month. The problem is that with each new high, momentum put in a lower high. In fact, on the most recent high last week, momentum did not even reach overbought readings. That's a big problem:

NDXEw

I think the Nasdaq100 is extremely vulnerable here for a severe price correction. This is not a market that I want to be long if we're below 3120 in the Equally-weighted Nasdaq100.

I've laid out my base case for why we want to approach the stock market from a neutral position, at best. I would add this bearish divergence to the list of reasons to be cautious up here entering the second quarter of 2017.

Cheers,

JC

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