The Nasdaq 100 Index (NDX) is only a small fraction away from hitting a new all-time high. And, it’s a small fraction away from creating one of the largest technical divergences ever.

We looked at this tech-heavy index a few weeks ago after NDX had hit a new all-time high, but the Nasdaq McClellan Summation Index (NASI) wasn’t confirming the move.

We argued this divergence was dangerous. It was similar to what happened in mid-February, just before the sudden stock market correction. And, it was a giant “CAUTION” sign for the stock market.

Well… caution be damned.

Here we are three weeks later. The NASI is sharply lower. Yet, NDX is nearly 100 points higher.

But, that doesn’t mean traders should just ignore the caution sign.

Remember… a summation index is a momentum indicator. It measures the number of stocks moving higher or lower with the overall market. Strong trends have lots of participation from a higher number of stocks. If the market’s moving up, it’s usually best if the summation index is moving up as well.

On the other hand, if the market’s moving higher, but fewer and fewer stocks are rallying along with it, then that “negative divergence” is a strong warning sign of an impending change in trend.

That’s why this chart of the NASI is so concerning…

Despite the continued strength in NDX, fewer stocks are participating in the rally. This was an early warning sign of an impending correction back in February. We’re getting an even stronger warning today.

Granted… this caution sign has been flashing for the past several weeks, and the market keeps moving higher. But, that doesn’t mean we should ignore it.

It’s kind of like the warning signs that might flash on the dashboard of your car. You can drive a little farther after the light comes on. But, there’s an underlying problem. And, it’s probably best not to ignore it.

Best regards and good trading,

Jeff Clark

Reader Mailbag

What do you make of this continued warning sign? Are we in for another nasty drop like in March, or is it truly “different this time”?

We’d love to hear your thoughts, and any other questions you might have. Write to us at [email protected].

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