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Long-term signposts suggest a less-than-healthy Nasdaq

After eight wins in nine outings that put plenty of space between it and the August low, the Nasdaq Composite pulled back Tuesday. However, there was not much conviction behind the selling, as Nasdaq volume came in 27% below average.

Technically, the session was an "outside day," which normally produces at least a one- to two-day negative bias when it appears at the end of an extended advance. Tuesday also qualified as a "shooting star," a reversal pattern in candlestick analysis.

Chart created using TradeStation. ©TradeStation Technologies, 2001-2015. All rights reserved.

As mentioned here many times, the two most reliable long-term signposts of market health are believed to be the breadth of an advance and the performance by interest-sensitive groups.

Along these lines, the bigger picture is that of a market being led by fewer stocks, i.e., an advance with deteriorating breadth. One example of this is a divergence between the Nasdaq and the S&P 500 that just began recently. The chart below shows the inability of the former to keep up with the latter.

Chart created using TradeStation. ©TradeStation Technologies, 2001-2015. All rights reserved.

Another example of this decaying breadth is the small-capitalization sector, which began lagging the S&P in July. Two more groups that began underperforming the S&P at the same time as the small-caps are the interest-sensitive banks and brokers, as shown below.

Chart created using TradeStation. ©TradeStation Technologies, 2001-2015. All rights reserved.

Chart created using TradeStation. ©TradeStation Technologies, 2001-2015. All rights reserved.

It can sometimes take quite a while for divergences related to breadth and interest-rate proxies to begin to slow and eventually reverse a bull market. In the present case, however, the divergences coincided with the Nasdaq's five-week July-August correction of 18% (on an intraday basis) and the S&P's 12% decline.

Meanwhile, in terms of individual...


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