John_Maynard_Keynes

Nasdaq Daily Reversal — Arbitrage & Sectorial Rotation

Short
OANDA:NAS100USD   US Nas 100
Amidst a financial market strongly distorted by the thirst of control from the central banks & their monetary policy craze headed exclusively toward supporting inflating assets valuation, it's become more & more obvious prices no longer represent neither economic reality nor actual asset value (assuming they ever did). Therefore, in such a climate of financial & speculative assets hyperinflation, it's highly interesting not to be too directional, on major indexes as an exemple, and rather seek arbitrage trading between different sectors. Today i'm proposing a Daily Nasdaq reversal short, within the aforementioned framework of arbitrage, as a hedge-trade against the Dow Jones, Tech vs Industrials.

Let's have a look at the Nasdaq/Dow Daily spread-chart NAS100/US30*100 (the *100 in the mnemonic was added to obtain more detailed «Volume profile» data / rows) :


As you can see, the spread between the two sectors has been ranging since summer of last year, showcasing clear arbitrage strategies being put in place between the two assets / indexes. Strategies that were most likely triggered as a result of widespread doubt amongst market professionals about global assets' valuation and their direction. Now addressing the technicalities of our spread, it should be noted that, on that specific timeframe, we've already broken the range' support during early of March. The spread reaching its upper pitchfork/canal boundary in conjunction with a 76,4% Fibonacci retracement right after breaking its range' support, points out toward a pretty good timing to start taking action on the components of spread itself. We can also witness a few enticing overload signals on the momentum/sinewave indicators, but signals on spread-charts are never to be taken too seriously as they're not extremely reliable.

To end with the spread-chart and contextualise a little bit more in-depth, this year long recent hedge trade on the two major U.S indexes becomes even more obvious when you switch to the Monthly timeframe, just to realize that NDX/DOW is a monthly range as well. You can also easily notice that the Daily hedge-trade strategies that have been put in place since summer 2020 coincidently happened to be taken on prices very close from the 2000 highs of the spread-chart (the year 2000 which happened to mark the end of the .com tech crazed bubble). Hesitation on a monthly top, heh.


So we've got short term timing & technical elements aligning with the broader decade long context, good. Now let's take a look specifically at our Nasdaq chart to outline more relevant technical elements that are going to lead to our trade.

Starting with the context : on the Monthly timeframe we can see that our beloved tech sector is no less than a bubble : a parabolic structure perpetually accelerating with increasingly ascending support trendlines, and not materializing any kind of consolidation whatsoever. It should also be mentioned that we havent finished a Monthly momentum cycle since 2012 (2010 for the Quarterly timeframe). Bubble meaning no cycle, consequently meaning a market structure' maturity excruciatingly harder to discern — that is besides the volatility burst & the chaotic range that precedes the final excess leading to the market top. A context to handle with care, to say the least.


Now that we know the broader direction the market is currently taking, we can start to look at our timeframe of reference, the Daily one :


Here are the different technical elements i could outline from that chart :

Prices

  • Reaching the upper boundary of both the Schiff Pitchfork & the Regular Trend Canal
  • 88.6% Fibonacci extension hit & showing short term price slowdown
  • 138.2% Fibonacci retracement from the last downward consolidating move, supposing a potential running or expanded flat

Signals

  • Cycle Alignement of both Sinewave & Momentum
  • Momentum about to print an overload signal (will confirm or not depending on the next Daily closes)
  • Momentum pointing at a possible triple divergence
  • Would appreciate an engulfing bearish candle close on the Daily timeframe within the next few days

Risk Management

The invalidation on this Nasdaq Short costs 3%, therefore i won't expose more than half of my capital on this position, that way i'm risking no more than 1.5% of my capital as a speculative loss on this trade (and even less with the Dow long part incoming). Validation levels are showcased on the chart based on «footprints» (historical low volume areas found using volume profile), lower boundaries of channels / pitchfork and Fibonacci retracements. TP 2 means at most a total of 50% profits taken on the original position. The rest will be held for lower targets on the Weekly / Monthly timeframes.

I'll further update this analysis as soon as the Dow Jones reaches its next supports areas (if it does so), especially since those same areas will allow me to start executing the opposite part of this hedge-trade (the long one).

But that's it for now

Hope this idea will inspire some of you !
Go easy on leverage and don't forget to hit the like/follow button if you feel like this post deserves it ;)

Kindly,
J.M.K