Identifying a Leader

//Identifying a Leader

Hawk’s Scan Sentry Report October 22

When you want to know what is causing global events, the common wisdom is ‘follow the money’. But when it comes to the financial markets which we like to trade it is all money. So, in order to get some clues to potential market movements we have to find out which markets are leading and which are following. There is an entire field of technical analysis called ‘Intermarket Analysis’ dedicated to this topic and does an excellent job of offering several blogs on the subject.  In this case I will keep it simple and just look at two American market index futures contracts to make my point.

I postulate that the NASDAQ has led the S&P in this four year rally we have been experiencing.  Why do I say that?  Well, if we look at some of the recent key points of the rally, particularly when price breaks through resistance levels and how far back it retraces, we see some tell–tale signs. Let’s compare weekly charts of the futures contracts for each index.  Note how on October 15th of 2010 the NQ was already breaking through resistance to new highs. The S&P didn’t accomplish that for another three weeks. Next, note the panicked pullback after the dollar downgrade in August/September of 2011. The NQ simply tested the previous support/resistance level and consolidated above that level whereas the S&P spent most of that consolidation below that level. The NASDAQ contract finally broke to new highs in late January of 2012; the S&P didn’t accomplish that until February 10th.  Later, when we experienced the sell off in May of this year, the NQ contract  never broke below the previous breakout price support level, whereas the S&P e-mini once again spent several weeks below that support/resistance level.

I mention this in order to draw you attention to where we are now. Note how the NQ contract has already broken below our previous highs from April 6; the S&P has not breeched those levels yet. If the NQ contract led the ES contract up it does not necessarily mean that it will lead the way down. However, in so much as the NQ appears to be the leader, I would expect to see the S&P follow the NASDAQ down at this point.  As noted in last week’s blog, fear is more likely to inspire this hyper-extended kind of market than greed… at least until after the American elections.

As usual, below are the charts of some of the symbols that I am looking at this week for my trading watch list. There are examples both long and short. Each contains a little explanation of the analysis visible on the chart. If you have any questions about the indicators on these charts please follow this link to a legend describing these tools.



(A Pullback-123 which combines a Trend Exhaustion 1 signal with a Pullback 23 signal to identify a Pullback Divergence. We also see a Trender Pullback here. This is occurring at the up trendline support level.)


(This is a similar scenario as above. Simultaneous bullish TE-1, Pullback 23, and Trender Pullback signals)



(A bearish Pullback Divergence identified by the Pullback-123 combination described above, this one at the down trendline resistance level.)


(Same setup as the previous chart with an additional Trender Pullback signal. )


(Another Pullback-123 Pullback Divergence in a downtrend. )

May the trend be with you,


Jan Arps’ Traders’ Toolbox is not an investment advisory service nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Examples presented on this site are for educational purposes only.  It should not be assumed that the methods, techniques, or indicators presented in these examples will be profitable or that they will not result in losses. There is a high degree of risk in trading.  Readers using this information are solely responsible for their actions and trade at their own risk. Readers should always check with their licensed financial advisor .

2018-01-08T07:35:14+00:00October 21st, 2012|Hawk's Picks|