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Relative Strength Chart Reveals Nasdaq Is Losing Its 20 Years of Leadership

After the burst of the dot-com bubble in early 2000 as shown in the monthly ratio chart (IXIC/SPX) between Nasdaq Composite (IXIC) and S&P 500 (SPX), Nasdaq was underperformed S&P 500 until the swing low formed in 2002. Refer to the relative strength chart (IXIC/SPX) below:

Relative Strength Between Nasdaq & S&P 500

Despite IXIC/SPX is a ratio chart, Wyckoff price structure together with Wyckoff events can be observed throughout. After the selling climax (SC) formed in April 2001 as reflected in the huge bearish price spread with acceleration to the downside, an automatic rally stopped the downtrend and into a trading range.

After a secondary test in September 2002, a sign of strength rally (SOS), which is classified as the best rally within the trading range broke above the resistance followed by a shallow backup action (BU) trading range until 2009. This is a classical Wyckoff accumulation structure pending the start of the markup phase, which is the beginning of the uptrend.

Nasdaq composite started to lead the S&P 500 since 2002 as it formed a higher high and a higher low subsequently.

The uptrend manifested after a breakout from the backup trading range in 2009 and accelerated in 2014-2018. After the COVID-19’s bottom in March 2020, there was a potential final speculative run up forming a buying climax (BC) in February 2021, barely touch the swing high formed in 2000, which acted as a resistance.

Next, a change of character, which is the largest down wave (as highlighted in orange) since the bottom in 2002 kicked in followed by an inability to rally up (as highlighted in blue) between May to November 2021, suggested more weakness ahead in Nasdaq Composite against S&P 500.

Should the relative strength chart (IXIC/SPX) break below the support (as annotated in horizontal brown line), it is likely to head down to test the lower support (as annotated in horizontal green line).

This could be a market rotation scenario as shown in my video last week or it could mean Nasdaq will drop more than S&P 500 should a market correction begin. Either way, Nasdaq Composite is expected to underperform S&P 500 and losing its 20-years of leadership since 2002 based on the relative chart (IXIC/SPX).

Price Target for IXIC/SPX with Point & Figure Chart

As relative strength chart is still unfolding and the support is not broken yet, it is still possible for the price to bounce up to higher target. Point and Figure (P&F) chart is a tool in price action trading with Wyckoff Method as traders can project the price target based on the causes built according to the Wyckoff’s Law – Cause and Effect. Let’s examine if there is enough fuel in the tank for the price to go higher in this relative strength chart.

As shown in the point and figure chart above, the original segment (in blue) was used in the calculation. The price targets based on the blue segment, which is the accumulation structure, are 3.5-3.75. The next segment (in orange) based on the re-accumulation structure, works out to be 3.45-3.65, which acted as a confirming count to the original segment.

The price targets from these two segments coincide with the resistance at 3.6 as formed by the previous high during the internet dot-com bubble in 2000. The fuel in the tank for the upside price target has been consumed as confirmed by the pullback in February 2021 once it hit the price targets.

It is crucial to pay attention to the next price action to confirm if the support will be broken with more weakness ahead or another trading range will be formed from here on to build up more causes for the next up move.