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Saturday, July 11, 2020

The NASDAQ Peak and Weekend Charts and Stuff

Last weekend's NASDAQ blog post gave a target of 10,601 based on Fibonacci wave relationships between wave 3 and 5.  Friday's peak was 10,621.8 (Fibonacci 21 points above the target). This makes the wave relationship not a perfect .618, but rather .632.  It was proposed that wave 5 of (5) would strike the upper channel line of 1, [b] of 4 peak, and the peak of 5 probably twice each in both log scale and arithmetic. This happened also.

We don't know what the futures will hold for the markets on Sunday.  They amazingly held above support all last week in increasingly volatile trading sessions.  So there is no need to hash and rehash all the counts and propose other exotic alternate counts. (although I will show the usual squiggles!)

The market is still severely fractured and last week's trading did nothing to make it better other than fracturing it further. There is 1 index (Wilshire 5000/SPX) poised to break over their down trendlines from February peak.   Yet, even if they gapped up (small gap mind you) Monday, they still would have some work to do to take out their June 8th peaks.

So the situation is setting up thusly for Monday depending on futures:

1. Futures hold or are somewhat bullish overnight, producing a possible exhaustion gap up that reverses after the NASDAQ Composite touches the intersecting log scale double channel lines at around 10,650, and then sells.  This would have the Wilshire/SPX probably breaking higher with SPX possibly touching 3200+ before selling off.  This might even have the Wilshire coming quite close to taking out its June 8th peak but it should hold.  This would be our false breakout scenario. Hard sell reversal is the theme.

2. Futures open flat(ish), oscillate, eventually Composite rises to meet the double channel line hit at around 10,650 and then reverse and sell. Same as above, except no (or small) gap up and possibly only the NASDAQ is green the other indexes get a head start down.  It reverses hard after achieving its wave 5 of (5) goal.

3. Futures sell hard creating a gap down weekly island top in the Composite for us to ponder forever and ever.

4. Futures gap up like 1.5 - 3% (upside surprise "third of third" spot creating a possible wave 5 of (5) scenario (or just even more confusion) in the Wilshire/SPX thus blowing up my primary major wave counts. I am fully ready for this scenario as like Charlie Brown, Lucy always seems to pull the ball away at the last second. 

Again why bother doing anymore mental gymnastics on a Saturday trying to predict what futures will do over the period of 15 hours until Monday's trading.  We have enough squiggles in place to consider 5 of (5) on the NASDAQ Composite complete as is. Yes there is very small room for a few more, so either way, its acceptable.

I found some bear chart porn.

 Another alarming volume ratio comparison. This time we compare the TOTAL VOLUME of the NASDAQ 100 to the TOTAL VOLUME of the NASDAQ COMPOSITE. Fairly simple setup.  Over periods of time, it might tell a story. Before I set this up, I wasn't sure what I would see. Would we see an extreme high NDX volume ratio compared to Composite? At first that came to my mind as might be the case, but the results surprised me until I thought about what may be going on.

Here is the weekly chart going back many years.  My conclusion is the QQQ's have been steadily collecting in an accumulation, the ratio has been steadily dropping. As the QQQ's go higher, the volume ratio drops between the 100 and the Composite. This makes sense. If Warren Buffett now holds $100B of Apple stock (he does), it took him a while to accumulate it. He is probably not accumulating very much more at these prices. 

The ratio plummeted at wave (5)!  This implies strongly that there is LESS and LESS greater fools to keep buying the NASDAQ 100. (and who would those fools be ? Yeah you guessed it - Robinhooders!)
And here is the Daily chart. The extreme dropoff in NASDAQ 100 ratio to Composite at (5) as prices rose, the ratio plummeted. This should set off alarm bells!
Here is that possible double channel line hit on the Composite if prices are up Monday. And the Wilshire on the bottom of the chart might hit its own green trendline, then prices should sell. This is the false breakout scenario described above. 
Revamped 5 of (5) Composite count, moving wave [iii] peak. This aligns more correctly with the future's count.  But it works to help us find the true channel. Friday's low was [iv].

Also shows where a possible double channel line hit would be. There is no need for this final hit it already has 2 touches in both log and arithmetic.
And now the day session Composite count would align with overnight QQQ's.

I'll tack on more as the weekend progresses.

Proposed wave [v] of 5. There is room for more squiggles.
What's interesting is that the QQQ's did go up another 19 points or so after the day market closed. It may have completed the final squiggles in A/H. And hit its own trendline(s)

Again not gonna pound my head over this, its only Saturday.
CPCE again with some added enhancements.  Similar setups but its even much more aggressively bullish than earlier this year.
One hour chart of the NASDAQ in log scale.
Tesla looks kind of long in the tooth. Triangulated its way out of danger last week. Look, if Intermediate (3) down begins in earnest, everything is going to sell anyway. But its nice to see that so many stocks seem to be "finishing up" their patterns.
A lot of things are at trendline support or resistance. VIX. Bottom half is the SPX. SPX has about 1.45% (like the Wilshire) to spare without breaking its June 8th peak.

I have a feeling Monday will be a very eventful day one way or the other.
The total volume ratio intrigued me comparing the NASDAQ 100 versus the NASDAQ Composite as a whole.  Being that the 100 is part of the Composite the ratio is a ratio x ratio which is just fine because as long as the parameters are constant, it can reflect useful data.

I assume the math works like this: If the NASDAQ 100 total volume is 60% of the entire Composite than this ratio comparison would work out as .6 x .6 =  .36   You can see .36 is where the ratio was in January of 2019.

If the total volume of the NASDAQ 100 drops to 38% of the entire Composite, than the ratio would be .38 x .38 =  .14 ratio.  You can see that ratio was met recently.

So what does it all mean?  Surely it seemingly doesn't make sense that the 100 index comprised of stocks like Tesla and Apple which have gone parabolic on an arithmetic scale should be getting a lot of volume - and they are ! (well it was...its dropping too)  You can see that on the chart in the volume bars of the NASDAQ 100, volume is certainly elevated.  But the rest of the Composite is certainly elevated even more.

What is happening though is the entire index is being pushed higher. All 2500 stocks in the NASDAQ Composite is getting pushed higher no matter what on tremendous volume. The 100 prices have now (again) topped above the Composite prices.   The 100 stocks are dragging the index higher yet for the rest of the Composite to keep pace it requires more and more total volume to push the other 2400 stocks to keep up. And thus the ratio is dropping like a rock.

And the 100 is likely running out of buyers.
As a curiosity, I went to the list of Composite stocks and picked 3 at random. The first is 1-800-Flowers (lol it was the first listed). Here is what we get:  Price to Earnings ratio of 36.  Spending money on flowers is a bull market activity. When social mood is rising, we act nice. (Anyone ever heard of the Tulip Mania?). In a bear market, when people are defensive with money, sending flowers will be one of the things that gets reduced.

Oh yeah, it's at  near the all-time high.

Here is the second one picked. Its a tech stock. Manufacturer of semiconductor products. P/E ratio of 39.   Its not like we haven't already gone through a massive electronic expansion phase over the last 30 years.  Its priced for perfection.

The third company is Roofing. At the moment it has a P/E ratio of infinity because it loses money. Its not at its all-time high, that has come and gone. But someone still values the stock.
Look, the point is the Composite companies are all likely grossly overvalued (along with the NASDAQ 100). But the entire Composite is being literally dragged along upwards with all the high fliers in the 100 with tremendous historic volume. It takes more and more total Composite volume for the other 2400 companies compared to  the NASDAQ 100 to keep prices like the above 3 stocks elevated.

Added: Actually upon reflection, these stocks are perhaps already "peeling away" from the pack having already peaked.

There are not many buyers left for the 100. I think the rapidly declining volume ratio reflects that perfectly. And if the 100 stalls out, its over for the Composite as a whole.

Here is another analogy;

Think of the NASDAQ Composite as one of those old Northeast city water mains.  Huge water main that has a good size branch connecting to it, we'll call it the 100 branch. The people living on the NASDAQ 100 street want more and more water. They are expanding. But the pipe is only so big. The main branch (Composite) needs more and more volume of water to satisfy the 100 branch. But the main branch is developing a lot of cracks (unprofitable companies) and is losing a lot of water to waste.  In fact the 100 branch is also developing cracks and is losing water (is Tesla even profitable?)

So the total water volume of the main has to be increased to satisfy the insatiable demand of the people living on NASDAQ 100 street.  Every street connected to the Composite main branch benefits and also has more water available. But the cracks (unprofitable companies) are never repaired. They just keep increasing flow of water to overcome any substructure deficiencies.

So the total volume of water flowing through the main, which remember, includes the 100 street's volume, versus the total volume through the NASDAQ 100 street only branch is increasing.  Thus the total water volume of the main pipe (Composite) and the total water volume of the branch pipe only (NASDAQ 100) ratio increases. And as the ratio increases (in reverse 100 vs. composite the ratio decreases) there are more and more cracks developing in both the main and now the 100 branch itself.

Thus to keep the flow going on 100 branch street tributary, they have to pump up the total volume in the main. The total water volume between the main branch and its 100 tributary start to become exaggerated.  If you're a technician at the water pumping station and your differential meter started to peg, probably an alarm would light up indicating there are major problems in the water piping network. But all the water technicians have been taught to just silence the alarm, that its no big deal, and continue pumping! So that's what they do.

At some point there are so many cracks in the main branch (Composite) and also cracks in its highly coveted tributary branch (the NASDAQ 100) that the system blows up completely.  The main branch buckles and water pours out. The NASDAQ branch is also overheated and cracked and over expanded far too fast and all the people living on 100 street wake up one day and there is no water at all.

Liquidity flows dry up completely and what do you think happened to the entire main and its 100 branch? They went thirsty and moved.

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