1972-2022 Comparison of Nasdaq and GSPC Indexes.
This chart shows the monthly Nasdaq and S and P 500 going back to the early 70's, a little after the Nasdaq index first started (which I believe was 1971). I should note that it's a monthly chart, again, so it's SMA's are monthly based, and I use logarithmic scale for long term charts. Log. is not really for short term so much. I like to look at very long term charts periodically, and freshly analyze them. I believe it's important to study longer time frames especially if you're a day trader like me. I get consumed by the short term movements, and believe you need a full history of anything to truly understand it.
It's fairly easy to see that the Nasdaq moves further and faster than the GSPC. The Nasdaq has tripled the long performance of the GSPC since 1975, and when it corrects, expect that to be more pronounced as well. I like to look at Fibonacci Retracements simply because other people look at them, and they're probably programmed into the big quant trading companies algorithms as well. Almost everyone looks at Fib. retracements whether they admit it or not. Of course, you can't trade directly at these levels as if they are a "golden mean". In the stock market if you meet one person who trades off of some indicator, you can bet others do to, no matter how crazy you think it is. Even if you don't agree with it; the sum total of all points of view of those trading, equate to the current price. I know what I'm thinking, it's the average of everyone's thinking, that I can't figure out. Of course, something like 80 percent of the price action is said to be the result of automated, algorithmic trading. So, I'm taking classes on computer programming, algorithmic trading, data structures, etc. Which leads me into some notations I have on the chart.
I have a big orange arrow pointing to October of 1987 when new computer trading systems got everyone in trouble. I've placed red arrows at points on the Rate of Change indicator where the ROC begins to diverge with price action. It isn't 100 percent, but if this divergence begins to occur be prepared for downside which could move extremely fast. We had a Rate of Change price divergence starting in 12/20/21 and look what's happened since then. Also the Rate of Change is moving down now, and it's very low already, about 20 below the Zero line. This indicator alone makes me believe that there will be more short side price action to come. The Nasdaq went from a low of 1265, roughly, in March of 2009 to a high of 16,212 in November of last year. That's not supposed to happen. There are people who are 31 years old right now, and there hasn't been a real bear market since they became legal adults. I generally live by not having a directional bias in the market, I just follow price action, and I don't believe much in holding positions overnight. I am just cautioning people who have a long bias after 13 years of a generally bullish market, that we have some very unique market condition coming into play, and learning a more price action based strategy, if they haven't is somewhat warranted. We have a few, MASSIVE, market caps holding indexes up which are skewing the outlook more positive than it should be. We have economic experts that are about 150 years old, and they've never seen anything like this. I loved the idea of Cryptocurrency, but I tend to agree with Buffet on that one. Crypto doesn't have value at it's core, it wasn't worth anything when the idea started. Normally, when a company goes public they have some core value. They produce something, or create a new technology that has value. I love that it trades 24/7 basically, I love that you can use it on the dark web, I love that politicians don't get rich from it, I loved that computer guys could make money mining it in the beginning. Soon you're going to need your own power plant and cpu company to mine it.
I ramble too much maybe, without getting to the point. The point is from 2009 to our 2021 index high, the recent Nasdaq low was about a 35% retracement of that gain, and statistically that's just not enough given the decade long upside performance of it. We had a decade run that came close to the Nasdaq gains in the 90's tech bubble. The tech bubble was around 1500% in a decade, we were close to 1300% in a decade (those numbers are give or take a little obviously). The tech bubble bottom 34 months later with a 84% retracement of it's decade long gain. We're currently only 6 months away from our high in November, and only saw a roughly 35% retracement. No one knows what the market will do, but if you believe we've seen the bottom you have to explain away numbers like that. My friend thinks it's un-American to be short a position. Remember that these quant. trading companies have MIT students developing algorithms to beat you out of your money. Competition is the American way.
It's fairly easy to see that the Nasdaq moves further and faster than the GSPC. The Nasdaq has tripled the long performance of the GSPC since 1975, and when it corrects, expect that to be more pronounced as well. I like to look at Fibonacci Retracements simply because other people look at them, and they're probably programmed into the big quant trading companies algorithms as well. Almost everyone looks at Fib. retracements whether they admit it or not. Of course, you can't trade directly at these levels as if they are a "golden mean". In the stock market if you meet one person who trades off of some indicator, you can bet others do to, no matter how crazy you think it is. Even if you don't agree with it; the sum total of all points of view of those trading, equate to the current price. I know what I'm thinking, it's the average of everyone's thinking, that I can't figure out. Of course, something like 80 percent of the price action is said to be the result of automated, algorithmic trading. So, I'm taking classes on computer programming, algorithmic trading, data structures, etc. Which leads me into some notations I have on the chart.
I have a big orange arrow pointing to October of 1987 when new computer trading systems got everyone in trouble. I've placed red arrows at points on the Rate of Change indicator where the ROC begins to diverge with price action. It isn't 100 percent, but if this divergence begins to occur be prepared for downside which could move extremely fast. We had a Rate of Change price divergence starting in 12/20/21 and look what's happened since then. Also the Rate of Change is moving down now, and it's very low already, about 20 below the Zero line. This indicator alone makes me believe that there will be more short side price action to come. The Nasdaq went from a low of 1265, roughly, in March of 2009 to a high of 16,212 in November of last year. That's not supposed to happen. There are people who are 31 years old right now, and there hasn't been a real bear market since they became legal adults. I generally live by not having a directional bias in the market, I just follow price action, and I don't believe much in holding positions overnight. I am just cautioning people who have a long bias after 13 years of a generally bullish market, that we have some very unique market condition coming into play, and learning a more price action based strategy, if they haven't is somewhat warranted. We have a few, MASSIVE, market caps holding indexes up which are skewing the outlook more positive than it should be. We have economic experts that are about 150 years old, and they've never seen anything like this. I loved the idea of Cryptocurrency, but I tend to agree with Buffet on that one. Crypto doesn't have value at it's core, it wasn't worth anything when the idea started. Normally, when a company goes public they have some core value. They produce something, or create a new technology that has value. I love that it trades 24/7 basically, I love that you can use it on the dark web, I love that politicians don't get rich from it, I loved that computer guys could make money mining it in the beginning. Soon you're going to need your own power plant and cpu company to mine it.
I ramble too much maybe, without getting to the point. The point is from 2009 to our 2021 index high, the recent Nasdaq low was about a 35% retracement of that gain, and statistically that's just not enough given the decade long upside performance of it. We had a decade run that came close to the Nasdaq gains in the 90's tech bubble. The tech bubble was around 1500% in a decade, we were close to 1300% in a decade (those numbers are give or take a little obviously). The tech bubble bottom 34 months later with a 84% retracement of it's decade long gain. We're currently only 6 months away from our high in November, and only saw a roughly 35% retracement. No one knows what the market will do, but if you believe we've seen the bottom you have to explain away numbers like that. My friend thinks it's un-American to be short a position. Remember that these quant. trading companies have MIT students developing algorithms to beat you out of your money. Competition is the American way.
Comment:
This was my idea, and I first have to apologize for a couple things. My text bubble points to black Monday of 87, and I typed 1978 instead of 87 inside the bubble. I was born in 78; maybe that number just popped in unconsciously. Also, I think I left out one of the most important things about the historical significance of the market we have now. I'm comparing the market now to the 90's tech bubble for several reasons, the biggest being, they're both decade plus runs of much higher than average returns. The second being younger people didn't really live through that market period. The Nasdaq peaked in March of 2000 at 5,132; it didn't take out that high until June of 2015. They're different situations, but that statistic should give everyone a little context.