If the Nasdaq Rallies, Don't Trust It

 | Jun 19, 2017 | 6:00 AM EDT
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I noticed something interesting over the last week of trading. A week ago Friday (June 9) Nasdaq, and technology specifically, had its first major plunge of the year. Well, I suppose it was the second plunge if we count that May 17 plunge, even though that one lasted exactly one day.

As of Thursday's close last week, the TRIN for Nasdaq had been over 1.0 for five straight days. Please consider that this hasn't happened in 18 months; not since January 2016 has the TRIN gone more than three or five days with a reading over 1.0. As a reminder, the TRIN, or Trading Index, is a relationship between the advance/decline line and up and down volume, so it is a measurement of what underlying stocks are doing. Typically, a high TRIN means there has been selling underneath.

Since 2012 we have seen 10 other instances where Nasdaq's TRIN has gone at least five consecutive days over 1.0. And since we haven't seen it in 18 months, those 10 instances occurred in a four-year period. That's how different this particular period has been.

In any event, I went and looked at each of the prior instances, and the one similarity all of them had was not one of them was "the" low in Nasdaq. In every single instance, even if we rallied from that point, the index always came back down. Take a look.

Here's 2012. The July pullback saw a nice rally and then a retest (green arrow). The late August period was mostly sideways, but TRIN was over 1.0 for six straight days. Nasdaq enjoyed a fast 100-point rally (3%) and then fell 15% in a hurry. The six-day streak of TRIN over 1.0 in October saw a few upside days and then renewed downside.

The curious part of 2013 is we all have this memory that the year was "nothing but up", but when I saw not one, but two instances of high TRIN readings for extended periods, I thought for sure I'd see nothing on the chart. Here in March 2013 it occurred for six days in a totally sideways market. Nasdaq kept going sideways, had a plunge in early April, then rallied, and another plunge of -5% in mid-April (green arrow is the retest).

When I looked at the following chart from 2013, I thought for sure the seven straight high TRIN readings would have been from early October, but in fact they were from late October (red box), so notice here again it ended with a plunge in early November (green arrow).

It took approximately another year before we saw such an extended period of high TRIN readings. Look at December 2014, which led to a great rally and then, back down again for a retest, not once but three times.

In June 2015, we saw five consecutive readings of high TRINs with a terrific rebound. Not shown on the chart is the August 2015 plunge, since I figure by now most of us recall that vividly, as Nasdaq plunged over 15% in a matter of days. Clearly, that late June low was not "the" low.

I do not have a chart, but in that August 2015 plunge we saw six straight days where TRIN was over 1.0. We did rally, but we retested in late September.

In November 2015 we saw the plunge in Nasdaq with a requisite rebound followed by the January massacre where we saw it again. In January there was a one day rally and then renewed downside.

Even if we want to use the October 2013 template where there was a small rally and a one-day plunge in early November, these statistics say to me that even if Nasdaq rallies this week it is likely to come back down for a retest in the coming weeks.

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