Following the torrent rally since the Fed introduced QE in October $NDX had settled in a seemingly permanently overbought RSI reading above 70 beginning in mid December. Indeed all of 2020 the daily RSI has been above 70, a very rare event.
Really striking also has been the consistency of the price channel since the mini December pullback. If algos could paint they may just paint a chart like this:
Like near the end of 2019 price exceeded that channel to upside briefly yesterday and subsequently failed to stay above producing a short term sell signal, that signal has sent $NDX back to the lower side of the channel today.
As of this writing this channel is intact, but the channel is also very much long in the tooth. A break of this channel risks ending this aggressive uptrend.
But that’s the short term speaking. On the longer term chart we can note a confluence of events that suggest the triggering of a larger sell signal.
Here’s the chart, explanations below (click on chart to zoom in):
Firstly note the RSI readings above 70 since the middle of December. Very rare to see such overbought readings extend for such a long period of time. It speaks to the one way nature of price discovery in the past 5 weeks and explains the steep and consistent channel in the earlier chart.
But let’s discuss the signal confluence: Yesterday $NDX printed a black candle, not only a black candle, but a black candle following an extended uptrend, but also as $NDX pierced the upper Bollinger band. As you can see in the chart that confluence of factors has produced sizable sell signals in the past year and a half. We saw it in October 2018, we saw it in April 2019, and again in July 2019 and September 2019.
Each time we saw corrective moves to at least the lower Bollinger bands and 50MA, even moves to the 200MA or even below. As $NDX is so massively extended above its MAs such reconnects should not surprise at some stage.
What is a black candlestick and why could it be bearish? A black or filled candlestick means the closing price for the period was less than the opening price; hence, it can be bearish as it indicates selling pressure.
Note too during the subsequent bounces in Q4 of 2018 the bounces ended twice with black candles. These black candles came in context of counter rallies and not extended uptrends, nevertheless they were quite meaningful at the time.
Will this candlestick be meaningful? We’ll of course see, but one can note some more intra-day downside action today. However we don’t have a new high on a negative divergence yet and note also the July 2019 event ended up with slight new highs first. Also note that following the signal price can maintain proximate range for several days before real downside emerges. So the signal is there, but it remains unconfirmed at this stage, but signals risk of sizable downside corrective risk into the 50MA at minimum, into the 200MA should a more serious correction evolve. If either corrective action does unfold we may have just seen black candle magic on the charts.
When is the signal invalidated? When new highs sustain. Temporary new highs would not be enough especially if they come on a negative RSI divergence. In that case the sell signal would potentially become more powerful. So bulls need sustained new highs to invalidate the signal.
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