Market Analysis

Warning Signal

Yesterday $TSLA was screaming all the way to $968. One of those once in a lifetime vertical bubble moves. In TSLA Buy Panic I had warned that the move was not sustainable based on technical extensions and a reversion move was coming. One of the technical targets I had outlined was a reconnect with the weekly upper Bollinger bands then at $714. Today the stock dropped to $704, a $268 drop.
The reason I mention this is not to pat myself on the back (the speed of the reversal to target surprised even me) but to point out the relevance of technical extensions.

They are meaningful and when things get extreme it is worth highlighting.

We’ve had many strong rallies over the past few years and the most recent one being one of the most extreme and one sided of this bull market.

Yesterday I pointed out two concerns in the $NDX:

Negative divergence on new highs and a large deviation from the 200MA.

Today on open $NDX raced even higher and put in a notable negative weekly divergence:

But it’s not the negative divergence I want to focus on here, rather it’s the deviations from the 200MA.

One can actually chart this and spot periods of extremes:

This chart is based on closing prices and the I’m showing the 150MA and the 200MA. On the bottom part in the chart you can see the percentage deviation from the 200MA. The message: When you get to extremes of 15%-16% below or above odds are building for a reconnect of some sort.

Examples here are the January 2018 highs at 16% and the December 2018 lows at near 15%. Now wer’re back in the 15%-16% range. This morning’s open was close to 17%, I don’t know today’s close yet as I’m writing this. In January 2018 the reversion produced a reconnect to the 150MA or to 3% within the 200MA. A subsequent new high brought the extension to 14% and then a reversion within 1% of the 200MA.

The December correction in 2018 brought about a reconnect with the 200MA and then a further rally to 10% above the 200MA.

Point is: Compared to the price action of the last several years such a deviation of 15%-16%  is extreme and rare and brings about sizable reconnect risk in either direction.

We’ve seen these extremes before in this bull market since 2009:

Out of 6 prior signals of similar extremes 4 signals produced reversion to the 150MA and/or the 200MA. The 2 times the signal did not produce a steep correction were counter rallies that came from larger corrections. The historic 2009 lows and the 2010 correction. Still the 2 signals resulted in pullbacks.

Incidentally this 15%-16% measure is not confined to the 2009-2020 bull run. We also saw it in 2007 during the final bull market high:

That final seemingly reason defying rally brought about by a 50bop Fed rate cut also brought about a 15%+ extension above the 200MA. And that was the top and produced an immediate correction to the 150MA. Nobody knew that it was the bull market top then, but the recession started a month later in December 2007.

So based on the last 2 bull markets here history suggests that $NDX is at high reversion risk, with risk as high as either a correction to the 150MA or 200MA so roughly a 14%-15% correction risk.

Of course it could always be different this time and perhaps we get a year 2000 replay. That was the tech bubble of all time and $NDX extended as high as 49% above its 200MA. But that happened only once and ended in disaster. Who wants that?

For now yesterday’s $TSLA buyers are already learning the year 2000 lesson the hard way: That reversion and reconnect risk is real and can be painful. $TSLA also serves as a reminder how quickly a stubborn bird can disappear.

$NDX is 15%-16% above its 200MA with a negative divergence on new highs and it’s showing some relative weakness versus the rest of the market for the first time in a long time. A warning sign? We’ll soon find out. For now bulls seem unperturbed, content to keep chasing an index into waters that have proven dangerous in the past.

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Categories: Market Analysis

2 replies »

  1. All this is good stuff but please remember your other signal is also flashing red. $ndx currently looking to print a solid black daily candle above the upper bollinger band.


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