NDX

updated: Jun 9, 2017

Last year at about this time we noted that NDX had completed a golden cross — where the SMA50 crosses above the SMA200 — normally a strong buy signal. But, as we also discussed, such signals had been head fakes the past several times in a row.

The 50-day recently crossed above the 200-day — a golden cross. However, this has been a head-fake several times in a row:

– the Sep 30, 2015 death cross marked a bottom instead of a top
– the Nov 17 golden cross preceded the high by only two weeks
– the Feb 5, 2016 death cross was followed by a bottom the very next session

On the other hand, NDX had also reached potentially significant resistance: two channel tops and a key Fibonacci level.

If the golden cross was to be believed, we’d see a strong breakout. If it was another head fake, NDX was due for a tumble. Unlike the Dow and the S&P 500, NDX had yet to even recover to its Mar 2000 highs.

It was a head fake. NDX went sideways for a week before plunging nearly 8% in just 15 sessions. The bulk of the drop (6.4%) occurred on just three days: Jun 23, 24 and 27. Clearly things were accelerating.On the 27th, the SMA50 actually dropped below the SMA200 — the dreaded death cross — on an intraday basis. As bad as things had been, were they about to get even worse?

Readers might remember the Jul 2008 death cross which preceded a 46% drop, and the Sep 2000 cross which resulted in a 79% crash. In other words, death crosses are not usually very healthy for stocks.

But, wait, did I mention that NDX experiences frequent head fakes? On Jun 28th, when the death cross officially occurred, NDX gapped higher. And, then it kept going. In three weeks, it gained a total of 16% (136% on an annualized basis!) and reached new, all-time highs — not bad for a bearish signal.Since QE started in late 2008, every single NDX death cross except one has signaled a bottom — usually the same day but within, at most, the next two sessions. The one exception, in Dec 2012, took 12 sessions.

If this doesn’t make you a believer in the Plunge Protection Team, I don’t know what will. And, considering how critical NDX’s top stocks are to the market’s overall direction, it’s understandable.

NDX broke above its all-time high on Aug 16, but then spent almost 4 months trying to break out before finally doing so on Dec 7. Since then, it has been a fairly straightforward meltup. The only hitch, now, is that NDX has reached a key Fib level that could prove problematic.

With the NDX providing much of the market’s leadership, is this something to be concerned about?

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