The Nasdaq 100 Index (NDX) is finally back to making new all-time highs, something that the S&P 500 has been doing more regularly in 2021. The NDX suffered a painful dip in February 2021, as big tech suddenly fell out of favor. Now, those stocks are back in favor once again.
This week’s chart shows an indicator which measures how many of the NDX stocks are above their own 100-day simple moving averages (100MA). When I first set out in 1999 to compile all of the data to compute this indicator for myself, I started with 200-day moving averages, thinking that would be the optimal lookback period. The result was okay, but I decided to do some tinkering with the lookback period to see if I could get something better. 100 trading days seemed to work better and give more useful indications, so I have stuck with it since then.
This indicator shows us extended conditions when it gets up above 80 or below around 30, but that is not all. And even when it does get extended, that does not mean that a reversal has to come immediately. It can stay extended for a while.
Divergences are very important, especially for tops. Divergent bottoms are much less common. An important point about interpreting the divergent tops is to establish the right time frame.
The current reading of 80 is still below the highs seen in January 2021, but that is not really relevant. The February dip serves to reset the clock, and so now we need to watch for a divergence developing on the new structure, which has not happened yet. The divergences which matter form over a period of just a few weeks. Apparent divergences over many months are not as important, and can instead be misleading.
It is a positive sign to see increasing participation in the advance, in the form of more of the NDX component stocks climbing up above their 100MAs. At the point when we see continued higher highs in the NDX with a smaller number of component stocks above their 100MAs, it will be time to worry about the renewed uptrend faltering.