Analyzing a tech breakdown
11/21/18

●Tech crunch continues, Nasdaq 100 (NDX) breaks October low

●A new 27-week low for the tech barometer

●NDX performance after breakdown weeks appears counterintuitive


 

Even though yesterday’s stock market action started out a lot worse than it ended, the tech-laden Nasdaq 100 (NDX) did something pretty rare yesterday. The index dropped 3% in early trading to break below its October 29 swing low—the first major US index to cross that Rubicon:

Nasdaq 100 (NDX), 9/21/18–11/20/18. Nasdaq 100 (NDX) price chart. Breakdown below October low.

Source: OptionsHouse


It was probably an unwelcome sight for tech investors, who have watched some of the sector’s biggest names get clobbered for the better part of two months. The intraday rebound that followed may not have cheered tech bulls who are now facing an NDX much closer to its February low (which is also around the 38.2% retracement level of the 2016-2018 rally) than its October high.

But that wasn’t the real story. As the following weekly chart shows, yesterday the NDX also fell below a 25-week low that was followed by two higher weekly lows (i.e., the lows of the previous two weeks), something it’s done precisely two times since September 1985—the week of December 18, 2000 and the week of November 10, 2008.

Nasdaq 100 (NDX), 3/24/14–11/20/18. Nasdaq 100 (NDX) price chart. Weekly breakdown.

Source: OptionsHouse


Of course, that’s not the only—or probably even the best—way to describe the NDX’s price action, but it does highlight how unusual it is for the NDX to penetrate such a significant (25-week or longer) low after rallying off of it for a couple of weeks. Even penetrations of shorter-term weekly lows that were followed by two-week bounces is a surprisingly short list. For example, there have been only 15 times  that the NDX made a new four-week (or longer) low, traded above that low for the next two weeks, and then fell below it the week after that.

Long story short, when the NDX spends at least two weeks trading above a significant swing low, it’s usually continued to move higher. That may give some bulls pause, despite yesterday’s modest intraday rebound.

But another (and more direct) way to look at what happened yesterday is that the NDX made a new 27-week low. That’s happened a little more frequently—74 times since 1985. We can divide these breakdown weeks into two groups, those that closed up (in a word, “bullishly”) and those that closed down (“bearishly”). The breakdown week closed up 21 times and down 53 times. The following chart compares the NDX’s median return over the next four weeks for up-closing breakdown weeks and down-closing breakdown weeks:

NDX 27-week new lows, 1985–2018. Up-close vs. down-close.

Source: OptionsHouse (data)


Surprised? When making a new 27-week low, as it did this week, the NDX actually performed better over the next four weeks if it also closed lower during the breakdown week. The performance gap maxed out at three weeks, when the NDX was nearly 2.5% higher after down-closing breakdown weeks, and more than 1% lower after up-closing breakdown weeks. (The jury is still out on this week being up or down, but the NDX would have to rally more than 4% by Friday to make it into the green.)

This pattern doesn’t imply anything about the longer-term trend, and current circumstances are going to dictate what the market does this time around, but it’s certainly something to consider as traders navigate a volatile tech environment.

Market Mover Update: January crude oil futures (CLF9) dropped more than 7% intraday yesterday, falling below $53/barrel for the first time in more than a year.

Today’s numbers (all times ET): Durable Goods Orders (8:30), Jobless Claims (8:30), Consumer Sentiment (10:00), Existing Home Sales (10:00), Leading Indicators (10:00), EIA Petroleum Status Report (10:30).

Today’s earnings: Baozun (BZUN), Deere (DE), SINA (SINA), Weibo (WB).

 

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