One indicator that I often find useful for short-term market trend confirmation is
the relative strength of the Nasdaq Composite compared to other major market gauges.
I talked Friday about how I like to look at the Russell 2000 ($RUT) for a broad
market measure with excellent trending characteristics. But the ultimate reality is
that the Nasdaq tends to be home to many high beta growth stocks (stocks which move
up or down faster than the market as a whole). This often makes the Nasdaq
performance versus standard benchmarks like the S&P 500 particularly telling as to
the tone of the market trend.
In the chart link below, you will find a chart of the Nasdaq Composite (with a 10-day
moving average in red), followed below by the S&P 500 Index, and then in the final
lower panel a graph of the relative strength line (in black) of the Nasdaq Composite
divided over the S&P 500. The absolute level of this relative performance line is
not significant, but rather the trend is what counts. As a result, I plot a 10-day
relative strength line (in blue) and a 20-day relative strength line (in red). When
the 10-day blue line crosses above the 20-day red line, it implies rising relative
Nasdaq performance versus the S&P 500, and a blue up arrow appears on the Nasdaq top
third of the chart. When the 10-day blue relative strength line crosses below the
20-day red relative strength line, it implies deteriorating relative Nasdaq
performance versus the S&P 500, and a red down arrow is posted on the Nasdaq price
chart.
As always, I look for price confirmation of the indicator signal. As a result, buy
signals (the blue up arrows) must see upside follow-through in the form of at least a
close above the buy signal day's high price. A more stringent condition is to
require a new 20-day high. Likewise, sell signals (the red down arrows) benefit most
from a new 20-day low as follow-through confirmation. Notice how that saves you from
the potential fakeout signals on this chart.
Relative Strength of Nasdaq Composite vs. S&P 500 - Daily
So where are now? Clearly the short-term trend must be graded positively thanks to
continuing Nasdaq relative outperformance, combined with upside follow-through.
While my 3-6 month concerns remain, this should not prevent us from capitalizing on
short-term pops to the upside until the Nasdaq gives a confirmed relative strength
sell signal.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
#forex4u - chat forex MIRC
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