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Bearish New Highs Divergence - The Nasdaq is Running Out of Steam

A few days ago we looked at the Nasdaq new 1-year highs and concluded that "the Nasdaq is putting on a facade. It looks strong, but has weak ‘bones.’"

Below is an updated look at the Nasdaq Composite (^IXIC) plotted against the number of new 1-year highs (of stocks contained in the Nasdaq Composite).

Since October 18, the Nasdaq Composite rallied as much as 6.7% (the Nasdaq-100 as much as 7.1%). October 18 is when the number of new Nasdaq highs peeked at 445. On December 31, when the Nasdaq recorded its most recent recovery high, there were only 239 new 1-year highs for individual Nasdaq components.

It is said that this kind of divergence reflects investors’ struggles to find stocks worth their money and trust. As prices continue to rise, value is harder to find and investors become more selective as they hone in on just a few stocks.

According to this theory, a few individual stocks mask the weakness of the collective index. Is that the case now?

Since October 18, the top four holdings of the Nasdaq-100 ETF (QQQ) – AAPL, MSFT, GOOG, AMZN – have gained as much as 14.67% on average (AAPL: +13.01%, MSFT: +11.50%, GOOG: +10.83%, AMZN: +23.32%). The Nasdaq-100 rose as much as 7.1%.

The theory is true; AAPL, GOOG and AMZN are picking up the slack of the increasing amount of laggards.

Theoretically this can go on for a while, but in a practical sense it suggests that risk is increasing.

This doesn’t mean that everything should be sold at this very moment, but investors should pinpoint the support – that once broken – will signal that the rally is over.

This must hold support for the Nasdaq is quite a bit below current trade, and only focusing on key Nasdaq support would result in a 5-10% drawdown.

Fortunately other indexes provide a much closer early warning signal. The Dow Jones chart reveals a very clear must-hold support not far below current levels.

To view the must hold support for the Dow Jones (DJI:^DI) click here:

Key Dow Support: The Difference Between ‘Pop and Drop’ and Continued Rally

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