Comprehensive technical analysis of the Nasdaq 100 stock index (NDX) shows that it's on the verge of a crash. This has tremendous implications for the economy and other stock indices. It goes without saying that it has implications for your investment portfolio, too.
We rely on our our decision support engine (DSE), which combines many empirical measures of momentum, breadth, relative strength, sentiment and pattern recognition into an objective algorithm that probability-ranks future price behavior.
Doing so give us a big-picture perspective that also helps to informs us what will happen to a stock or index in the near term.
Click here to see the chart in a new window.
Above is the weekly bar chart of the Nasdaq 100 showing the rise of the last four years as complete. If accurate, it also means the rise off the 2009 crash low is complete. And, if that is accurate, the largest decline since at least 2009 is set to begin -- soon.
The red arrows at the upper right of the graph highlight the path that should be seen in the next six to 12 months, and point to at least a test of the light green box, around 3500, with much more bearish potential thereafter toward the bright green box, around 2700.
The message of the market, therefore, is to sell now, before the Nasdaq 100 closes below 4800. This is the alert we sent members of our DSE Alerts service on Thursday. You can follow this service free for a week at @DSEliveTrader as our guest.
If you click the link above the chart, you'll zoom in to see the notations, which show the "break" of the rising red trend line, followed by the retest/rejection at the underside of the line. This retest/rejection is known as the "kiss goodbye." Think of it like this: Your son prepares to leave for college, bolts out of the car as you drop him off, then gets nervous and tries to get back into the car to return to the high school lifestyle, finds you've locked the car doors, and finally turns and heads away toward his new life. The old trend has been broken.
In addition to this rare and ominous termination pattern, the larger pattern that began at the 2015 peak also appears to be mature. This contracting triangle (labeled A, B, C, D, E) makes up wave (4) within the Elliott Wave sequence. Once complete, wave (5) follows in a structure containing five subwaves, which often measures approximately the same distance as the widest part of the triangle that just completed. This has now manifested and can be considered complete.
Looking at the lower pane of the chart, we can see the stochastics have made a slightly lower high compared with August. The index's level, however, has made higher highs. This combination is called a bearish divergence sell signal. Additionally, the stochastics have now crossed down (red below green), and both red and green are back under the 90% extreme overbought threshold.
Combined, these empirical indicators (There are others we don't have the space to describe here.) suggest that 4800 is a very important "line in the sand." You shouldn't wait for the Nasdaq 100 to cross it. Now is the time to take profits in the Nasdaq 100 or any of the stocks in the index. At the very least, you should protect your profits with a sell stop that corresponds to that 4800 level.
If you have employed leverage in your investments, you need to take immediate action and eliminate any and all leverage.
If you're not exposed to this sector or its components, you can use 4800 as a level to establish short exposure with very little risk and massive potential reward. You'd sell short the index now, or upon a break of 4800, and put a protective buy-stop order at the 4910 level.
As of this writing, that would put you short around 4835, limit your loss to only 75 points and position you to see a 1335 +/-100 point decline. That's an incredible 17-1 reward-to-risk posture. It's a rarity for most investors, as few have the patience and trigger finger required. Yet, here it is.
Don't say no one told you.
For updates on this analysis, as well as other trading opportunities, try our DSE Alerts service for free for a couple of weeks, or contract us at email@example.com
This article is commentary by an independent contributor. At the time of publication, the author held a position that was equivalent to selling short the Nasdaq 100.