There are two factors that we evaluate: price location and relative strength (not to be confused with RSI). Today, the NSX closed on it’s high and almost took out yesterday’s high as well. How much longer do you think the markets can run like this without a significant retrace? In terms of location, the risk of retrace is HIGH and even though it is possible to push somewhat higher, the potential is very likely to be limited. This means this is a time to be more cautious, defensive and selective, NOT “feeling safe”.
Why am I so contrarian here? There is no structural evidence that a broader retrace is in play, or even beginning. The red flag can be spotted when you compare other markets like the S&P 500 and Russell 2000 which are not pushing new highs like the NSX. The S&P in particular still has significant resistance around the 3200 area which means a proportionally large number of stocks are NOT participating in this race to the moon. A healthy rally is one where they are more or less in sync.
Keep in mind, I am not calling for a bear market, or a trend reversal. I am anticipating a healthy retrace and the nearest level of support on the NSX is the 10,200 area. If that is taken out, the next inflection point is around the 9750 area (historical market peak) and IF that is taken out, 9150 is next.
That is a significant move from current levels, but that is what we must consider in terms of risk. The retrace can come out of no where, and a chart will NOT provide any kind of “predictive” value until supports are taken out, and some kind of clear bearish structure is established which is a process that can take days or even weeks. In any case, the herd mentality is often the strongest at market turning points, learn to anticipate it, not participate in it.