It’s been said that a fragmented market is a sick market. This sounds cliché-ish, but there’s some truth to this observation.
As stocks continue to rise, value is harder to find and investors become pickier. Picky (or selective) investors moving into certain stocks and culling others causes the kind of fragmentation absent in an ‘all in’ bull market.
This kind of fragmentation wasn’t visible at the May highs, which is one reason why the Profit Radar Report strongly advised that new highs are on the horizon.
Fragmentation however, became a factor at the August highs. The S&P 500 (SNP: ^GSCP) and Dow Jones (DJI: ^DJI) reached new all-time highs on August 2. The Nasdaq-100 (Nasdaq: QQQ) reached a new recovery high on August 13, the Nasdaq Composite (Nasdaq: ^IXIC) and Russell 2000 on August 5. The NYSE Composite completely failed to surpass its May 22 high.
Since early August, the Nasdaq-100 has outperformed every other major index and came within 0.25 point of setting a new 154-month high today. This is largely due to the performance of Apple (the July 29 Profit Radar Report recommended to buy AAPL).
By contrast, the S&P 500 (NYSEArca: SPY) is 55 points (or 3.2%) away from its all-time high.
Will the Nasdaq-100 drive the S&P 500 to new highs?
To answer this question we do well to ‘rewind time’ a bit. About a week ago, the S&P 500 (along with the NYSE Composite) was at a crucial inflection point.
The daily S&P 500 chart below highlights the importance of the 1,635 level, where Fibonacci and trend line support converged.
Via the August 28 Profit Radar Report I shared this simple piece of analysis:
“We could analyze this market until we turn blue in the face, but I don't think it would be of much benefit. Bottom line is that we are at an inflection point and we want to attempt to capture a portion of the next move with as little risk as possible.
If the S&P drops below 1,622 we will go short and use the ascending green trend line as stop-loss. If the S&P moves above 1,642 we will go long with a stop just below the green trend line.”
We went long the S&P at 1,642 and remain long. We haven’t logged a massive gain, but the trade is profitable and there is more up side potential for the Nasdaq and the S&P 500.
The September 5 Profit Radar Reported pointed out resistance at 1,662 (red line) and raised the stop-loss.
The previous decline has left open chart gaps, which act as magnets for prices, but the S&P 500, Russell 2000 and S&P MidCap 400 all pulled back from the same kind of trend line resistance today (see red line in chart above).
I think odds still favor higher prices, but due to today’s interaction with trend line resistance we’re watching our long position very carefully.
Simon Maierhofer is the publisher of the Profit Radar Report.
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