Strange but True

This might be a first.  Yesterday, the Dow and Russell hit the upper end of their Weekly Expected Moves, whilst the NASDAQ 100 hit the lower end of its Weekly Expected Move. In other words, you could practically have done a pairs option trade playing the NASDAQ 100 index off the others. Since these indexes are nearly always highly correlated, the situation is unusual. Strange to be sure, but true. The question remains, is this healthy, and does it give us any clue as to future direction?

As you can see from the chart above, another unusual feature of this 20-week cycle correction is the broadening formation in the S&P 500 index. I recall a similar corrective pattern unfolding in the NASDAQ 100 back in 2014. The pattern resolved bullishly, but not until after it jumped off a cliff from the upper resistance downtrend line, a position analogous to where we find the S&P 500 index now. But the textbook says it is supposed to resolve bullishly – it simply leaves out a few details about the road to nirvana. The broadening formation above is not to be confused with the megaphone broadening formation in the S&P 500 that has been unfolding since 2017. That macro formation, tilted in the opposite direction of what we see above, normally resolves bearishly.

I mention chart patterns from time to time when they might be relevant. Over the years, these patterns have become less reliable as they tend to be obvious to everyone who has read an investment book, and they lend themselves to algorithmic programming. In a sense, the market efficiency that follows mass recognition of the patterns tends to cancel them. That is unless the pattern appears to coincide with something else that could be unfolding. 

As mentioned recently, the head and shoulders pattern is an example of a reliable pattern when it appears near a topping or (when it is inverted) bottoming cycle. As practically a real-time example, the NASDAQ 100 just flashed a clear H&S topping pattern to mark the peak of the 20-week cycle, as you can see from the chart below: