Bearish Candle In The World's Strongest Index

Let's start with why we're focused on the Nasdaq 100. It incorporates all three of the factors that equity investors have favored for years: US Stocks, Mega/Large-Cap Stocks, and Growth Stocks...all in one liquid, investable index. Its strength is clear as it's only 7% below all-time highs while most other indexes in the US and globally are much further off their highs.

Now that we understand why this index is so important, let's look at today's "bearish engulfing" reversal candle.

Prices opened above yesterday's closing level, traded marginally higher, and then closed at the lows of the day, "engulfing" the real body of yesterday's candle. Hence the name, bearish engulfing candle. While not a reason to panic on its own, if it sees follow-through selling in the coming days then a short-term top is confirmed in prices.

Click on chart to enlarge view. 

So now we've established a potential change of character in the world's most important index, what are the rest of the US indices doing? Well, after today's selloff they've put in a "lower high" for the first time since the bounce began in late March.

Again, not a major issue until we see downside follow-through, but a noticeable change of character. Also note that this is occurring in the German Dax, Euro Stoxx 50, and several other important global indices.

In addition to what we're seeing in stocks, we're also monitoring the performance of the two most liquid alternatives to Equities...US Treasuries and Gold. Both of these have held up extremely well since late March and are consolidating near their highs.

If stocks were beginning a new bull market, it's unlikely that these two "risk-off" assets would be seeing money continue to flow into them. A breakout to new highs here is likely to occur if/when stocks do see downside follow-through, so something to watch from an intermarket perspective. You can throw the Yen/US Dollar currency pair into this "safe-haven" category too.

Within India, there's near-term cause for concern as well. On May 4th we saw the Nifty 50  (and the other major indices) confirm an "Island Reversal" which is a candlestick pattern that signals a near-term reversal in prices. Since then, they've had trouble getting and staying back above the 38.2% Fibonacci Retracement of its 2020 decline at 9,400. If the strongest index in India is having trouble gaining traction, then Equities, in general, are likely not doing too well in that environment.

Last but not least, in addition to seeing the weakest sectors in India breaking to new lows, we're witnessing some of its leading stocks run out of steam over the short-term. Here's PI Industries failing to get above resistance near 1,585 and slowly beginning to roll over again. Notice momentum failed to reach overbought territory as well. And there are plenty of other leading stocks out there exhibiting these conditions.

Together these five charts/factors suggest some near-term caution for Equities as an asset class, particularly if they confirm with follow-through in the coming days/weeks.

Structurally, these developments don't change our view that the market remains at risk and we've outlined new short ideas just this week.

It's clear that strength in the US and other developed markets has been keeping weaker markets like India afloat, but if they begin to roll over then laggards like India are likely to experience much further downside.

We're watching these developments closely.

Thanks for reading and please let us know if you have any questions.

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Allstarcharts Team