[Chart Of The Week] Mixed Signals Continue At Index Level

JC Parets
December 2, 2020

Last week we suggested that the major indices could be due for a pause after a massive run in November.

So far we've seen the large-cap indices churn sideways, but the mid and small-cap indices pushed to new recovery highs.

Today those mixed signals continue. Not just in India, but around the globe.

Let's take a look at what we're seeing and how we're approaching it.

On the left, we're looking at the Nasdaq 100 Index, which is comprised of Mega-Cap US Technology stocks and has been a massive outperformer for years. And then on the right, we have the price-weighted Dow Jones Industrial Average.

Click on the chart to enlarge view.

On the left, we can see the Nasdaq 100 correcting through time over the last three months as we saw rotation into cyclical areas of the market like Financials, Materials, Energy, etc. But now prices are pressing up against the top of that range and attempting to make new highs.

On the right, we've got the Dow Jones Industrial Average breaking out to new all-time highs about three weeks ago, but stalling and struggling to gain any upside traction.

The flat 200-day moving average and inability of momentum to reach overbought conditions suggest that this could turn into a "failed breakout" and need more time to digest before continuing higher.

And at the international index level, we're seeing a lot more mixed signals than we were just a few weeks ago. A lot of these country indexes are approaching logical resistance levels as momentum creates a negative divergence...or stalls out before reaching overbought territory.

So while there is a lot of "fear of missing out" present, we remain somewhat cautious in the very near-term. There is no longer an abundance of setups with attractive reward/risk and well-defined entries like we saw in early/mid-November.

Instead, we're seeing extended stocks getting more extended. Great for shorter-term traders, but not for our timeframe.

So what does that mean for us right now? It means we have some patience and wait until the end of the week when we have more information.

Will these divergences we're seeing in the Dow and other international indices matter? or will the Nasdaq 100 break out successfully and drag the rest of the world higher with it?

That's the big question. And right now, we don't have enough information to answer it. So we wait.

In the meantime, when our open positions hit our price objectives we respect our target and take profits.

And if you absolutely have to be allocating new capital right now, we only want to do so in select situations where the risk is very minimal and well-defined. That way if our "cautious view" does play out, we can take a small loss and get back to patiently waiting for a fatter pitch.

Hope that makes sense and helps understand the current environment a bit more. We'll have additional posts out in the next few days talking about key areas of the market where some of those well-defined risk setups we're alluding to can be found.

As always, thanks for reading and please let us know if you have any questions!

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