NDX Facing Key Technical Tests

We saw a startling rally on Monday, with major indices like the S&P 500 Index (SPX) and Nasdaq 100 Index (NDX) each rising well over 2%. As the week progressed, we saw those indices give back most if not all of those gains. It showed that sustainable gains – at least for now – may be elusive. That said, SPX seems much more resilient than NDX, which is facing key technical tests amidst a recent spate of volatility.

When we compare the recent performance of the two indices, we see that neither has done well over the past month, but SPX has been the outperformer. Over the past two weeks, during rallies its highs have been higher than those of NDX, while the latter index has made lower lows during its declines.

1 Month Chart of NDX (white) vs. SPX (blue)

1 Month Chart of NDX (white) vs. SPX (blue)

Source: Bloomberg

The outperformance of SPX is also apparent in a year-to-date chart. NDX is essentially flat for the year, while SPX is up about 2%. Neither is stellar, but we can see that SPX appears to be in better technical shape than NDX. Both made new highs in mid-February, but while SPX retested those highs twice during recent rallies, NDX has not. NDX has shown a pattern of lower highs and lower lows, which can be worrisome for future performance.

Year-to-Date Chart of NDX (candles) vs. SPX (blue line)

Year-to-Date Chart of NDX (candles) vs. SPX (blue line)

Source: Bloomberg

All things considered, these short-term charts are not particularly worrisome. Flattish performance over a couple of months is nothing to be concerned about, and to be expected at various times in a normal market. But investors have not become accustomed to normal markets or flattish performance. Behind a rapidly growing Fed balance sheet and successive rounds of fiscal stimuli, investors have come to expect stellar results. The first test for NDX, along with SPX, is how investors will react if we see an extended period of sideways movement.

The more important test for NDX in the short term is whether the 100-day moving average can continue to provide support for the index as it has for much of the past year. The following chart illustrates how different moving averages have defined the trends for NDX over the past 2 years. Steeper rises are defined by shorter-term moving averages than more gradual rises. That is evident in the chart below:

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