1/ Double Negative Momentum Divergence
2/ What Breadth Thrust? – Part 2
3/ Rates Poised to Bottom?
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1/ Double Negative Momentum Divergence
As the Nasdaq 100 index (NDX) pushed to a new recovery high on Monday, its 13-week rate of change (ROC) posted a lower high. The last time we witnessed a negative divergence between price and momentum with respect to this index, it occurred around the July 17th high. Then, the index unceremoniously declined by nearly 12% over the subsequent three months. Importantly, not only has momentum failed to confirm that advance in the NDX, but it has fallen well-short of the June-July momentum peaks, leaving a double negative divergence evident. While it is possible for momentum divergences to be resolved, more often than not they have proven to be reliable warnings signals of an impending trend change.
2/ What Breadth Thrust? – Part 2
In yesterday’s post, we referenced the popularity of the Zweig “Breadth Thrust.” While it’s probably the best known breadth thrust indicator, the most reliable breadth thrust indicator that we have studied is the NYSE Moving Balance Indicator (MBI), developed by Humphry Lloyd in the 1960s and detailed in his 1976 book entitled, The Moving Balance System. Without getting too deep into the weeds, the MBI measures the momentum of the 10-day moving average of net advancing issues on the NYSE. When the MBI registers a weekly close above 85%, it is indicative of a sustainable surge in the market’s breadth of participation – signaling every durable bull market advance in the S&P 500 since at least 1965, without registering a false positive. As of Friday’s close, the MBI has posted a high of no greater than 63.5% since the October 27th low. As such, forward 12-month returns for the benchmark index are likely to be fairly pedestrian.
3/ Rates Poised to Bottom?
The 10-year Treasury yield posted its recent high at 4.99% on October 23rd. It has since pulled back sharply to test its Fibonacci 89-day EMA. Nevertheless, we sense that rates have some unfinished business on the upside. The breakout above the October 2022 high of 4.33% just two month ago projects a measured move to approximately 5.41%, but the yield thus far has failed to achieve that target. Meanwhile, the ascending trend line connecting the 2021, 2022, and 2023 lows remains intact. Indeed, yields have yet to even retrace a Fibonacci 38.2% of the 2023 advance. Moreover, our multi-timeframe momentum study remains positive. As such, we suspect that the lows for this correction may be near at hand – with perhaps 20 bps of additional risk. If our hypothesis is correct, then 10-year Treasury yields may be setting-up for a major move higher that could potentially approach 100 bps in total magnitude before peaking.
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Originally posted 21st November 2023
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