I prefer using classical technical analysis to get a perception about the markets, especially at higher timeframes. Here are a couple of charts on US Market NASDAQ Index (Daily 200 Moving Average Charts, Quarterly – Market Profile, Quarterly ADX Divergence, Quarterly Smooth RSI) with an interesting perception which indicates potentially overvalued NASDAQ charts with a greater mean reversion odds.
1)NASDAQ – No of Days Since 200 Moving Average touch and price stayed above 200Moving Average
One of the indicator which talks about how many days price spent trading above 200 period moving average. The current value for NASDAQ is way above pre-historic levels since 1985. NASDAQ crossed 494 trading days staying above 200 moving average since 07th July 2016 (i.e almost for 2 years price spent above 200MA).
One can argue that market can remain irrationally staying above 200MA for many more days to come. Yeh, it can be however it is one of the potential zones to watch out for mean reversion zones. NASDAQ has seen a 2009 Low of 1265.52 since that it had so far made a historic peak returns of whopping 516% absolute returns. Recent high comes around 7806.6
Similarly, NASDAQ Technology Index crossed 499 trading days staying above 200 moving average. Though NASDAQ hit an all-time high in recent times, technology index (NDXT) hit an all-time high of 4544.46 on 13th March 2018 and still struggling to make an all-time high.
Here are the NASDAQ top 11 occurences where the index stayed above 200MA in terms of number of days.
2)NASDAQ Technology Index – No of Days Since 200 Moving Average touch and price stayed above 200Moving Average
3)Market Profile/Price Distribution Charts
Market Profile when applied to the quarterly charts one can find that intermediate participants inventory is getting long to too long with overlapping value area it is a cautious sign in the intermediate term as more and more players are chasing the price and momentum. The end result is a high probable liquidation.
4)ADX Divergence
ADX indicator is a classical trend strength indicator which also plays a better role in identifying momentum divergence. Here is what investopedia says,
From the visual representation, NASDAQ daily chart is continuing with ADX Divergence at higher timeframe (Quarterly charts) while hitting all-time highs, which indicates that higher timeframe momentum likely to slow down relative to the previous ADX peak. It is a clear sign that price likely to lose its momentum in the near future.
5)Over Bought RSI Levels
During Mar 2000 dot-com bubble smooth-RSI on quarterly charts made a peak value of 94.17 and the current reading is at 97.44 with NASDAQ hitting an all-time high. RSI readings are definitely at alarming levels which don’t seem to have investing odds or following the trend at current levels as the trend has higher odds of taking mean reversion path.
Combination of all the above information says that possibly NASDAQ is overvalued and could take a mean reversion towards 200 Moving Average. Current 200MA levels come around 7054 which is approximately 640 points or roughly 8.2% from current levels.
