We saw something this week in the Nasdaq Composite that we’ve never seen before.

In the same trading day, the Nasdaq hit both an all-time high and a 1-month low.

Such a pattern is referred to in the technical lexicon as a Bearish Engulfing or Outside Reversal day. The definition only requires the current day to exceed the range of the prior day, whereas this week it actually exceeded the range of the prior month.

Historically, just how bearish are such patterns?

As it turns out, they don’t seem to be bearish at all. Since 1978, we have seen 477 Bearish Engulfing days in the Nasdaq Composite. On average, the forward returns (1-week to 12-months) are still positive and not meaningfully different than all other days.

Note: Price Returns Only, Does Not Include Dividends

Now, one might argue that what we saw this week is significantly more ominous than your average Bearish Engulfing because of how many days it engulfed. Perhaps, but the problem is there is no precedent to compare to as this was the record. Drawing any conclusion, then, would be pure conjecture.

If we narrow the engulfing range to one week, we find 16 prior examples. The returns in this sample do appear to be weaker (-1.4% over the following month and positive only 31% of the time) on average.

The problem, though, is that the sample size (16) here is very small, occurring on average once every two to three years since 1978. Can we really state with any confidence that the returns following such a unique pattern are due to the pattern itself and not just random chance?

No, especially when they run contrary to the larger sample size with a less stringent definition. Which is why I would conclude that the Bearish Engulfing pattern is a misnomer – not because something bearish can’t happen from here, but because we cannot expect something bearish to happen. Regardless of what the Nasdaq does from here, this pattern will not have predicted it.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

This first appeared on Allstarcharts,com April 23, 2016

The only thing that pays us in this market is price. That’s it. So what we try and do is use a handful of supplemental indicators to help us identify when a change in trend is about to occur. One of the more helpful tools we have to achieve this is momentum. We start to see momentum readings diverge from price, before price ultimately peaks in the coming days, weeks, or months; depending on the timeframe in question.

I personally choose a 14-period relative strength index (RSI) to gauge momentum across asset classes. You can read more about how I use RSIhere. In this particular case, I want to focus on the obnoxious amount of bearish momentum divergences that we’re seeing in many of the most important indexes, sectors and stocks around the world. These “divergences” occur when prices make new highs, but momentum simultaneously makes a lower high. It’s a sign that a change in trend is approaching. Since we take a weight-of-the-evidence approach to markets, it’s not just that we’re seeing one or two of these sprinkled around. They’re showing up all over the place.

Here are just a few examples worth noting:

S&P500

Nasdaq Composite

Latin America

Emerging Markets

Freeport-Mcmoran

Utilities Sector

IBM

Chile (who led us from the start and a was big reason we got bullish stocks in late Jan)

Brazil

Semiconductors

Industrials

Apple

Become A Member of All Star Charts for further interpretation of this behavior, and more importantly, how we’re trying to profit from it. With Your 30-Day Risk-Free Trial, you gain access to the Trade Ideas Page, the Weekly Letter to Members, an Archive of all the Monthly Conference Calls, access to the Chartbook and Many Other Bonus Features.

Last Friday we saw some historic moves for a relatively flat market day.  As you probably heard, Google (GOOGL) jumped 16% to a fresh new all-time high.  In the end, the total market cap for the tech giant jumped $66.7 billion to $477.4 billion.  This was reported as the largest one-day gain for any company ever.  I can’t confirm that, but I did find the $66.7 billion one-day jump was incredibly larger than all but 65 companies in the S&P 500.  

Now here’s what is so interesting about Friday’s action.  The Google strength masked an otherwise weak day.  Of course, coming into the day was the strongest five-day rally of the year, so some weakness would probably be normal.  None the less, one common trait of the end of bull markets is fewer and fewer stocks participating.  This is a sign of deteriorating market breadth and one clue things could be on shaky footing.  Was Friday the ultimate example of this?  Here are a few stats I found.

Anyone of those by themselves sound rather bearish.  When you combine them all it definitely makes you take a step back and think.  Let’s take a look at a few charts.  

Here is a chart back to 1998 that shows there has never been a day the S&P 500 was green with less components higher.  Friday had just 137 components higher, while the S&P 500 was slightly green.  We saw clusters of this in the late ‘90s and a signal right before the bottom dropped during the Financial Crisis.  But the most recent three signals (one in late ‘12 and two in early ‘13) did little to slow down the bull market.  

View this chart HERE.

The Nasdaq made a new high and was up nearly 1% on Friday, yet saw more than 500 decliners than advancers.  The last time that happened was early 2000.  But what I find worth noting is from ‘87 till the ultimate peak in 2000 there were more than 60 days that had negative breadth while making a new high.  Maybe this isn’t the clear cut sell signal it sounds like?  

View this chart HERE.

Lastly, one reason I side with a surprise summer rally here is so few are expecting it.  When the masses lean one way, it usually pays to go the other way.  In fact, more than 40% of those polled in the Investors intelligence US Advisor’s Sentiment Report are looking for a correction.  As you can see, previous signals have marked some nice times to be bullish.  

View this chart HERE.

Friday was a rare day.  Is the fact Google had its second best day ever out of more than 2,700 trading days the outlier that triggered all the rare events above?  That is my opinion.  Also, from ‘87 to 2000 negative breadth and new highs were a rather normal occurrence for the Nasdaq.  Clearly this is worth watching, but it isn’t a signal to sell everything either.  

Thanks for reading and be sure to follow me on Twitter and StockTwits.

The S&P 500 is trading lower after remarks by Yellen related to market valuations.  However, references in the past related to market valuations have not marked the top in markets.  Most recently, Yellen expressed worries about stretched valuations of the biotech industry.  Contrary to what most would expect, even after the recent pullback, IBB is up over 35% since her comments.  Another prime example was the “irrational exuberance” speech given by then Federal Reserve chairman Alan Greenspan in late 1996.  The S&P 500 went on to rally another 106% before a market top in 2000.  Moreover, the Nasdaq Composite added an additional 292% before reaching its’ ultimate top.

The above chart shows annual returns of the S&P 500 when the price to earnings ratio is greater than 20 which is the standard level that most use when referencing overvalued markets.  Surprisingly enough, returns have been positive more often than not when P/E levels are elevated.

After hitting the big Nasdaq 5000 level, the market decided it was time for a breather. Whether that breather turns into a correction will depend on how the Nasdaq handles a couple of key support levels within the garden variety 2 to 5 percent pullback range.

With this in mind, it should be noted that pullbacks from big round numbers like Nasdaq 5000 are nothing new. And this is a different market landscape than the bubble in 2000. (I covered those differences last week).

As well, after last Monday's closing high, I noted some Nasdaq statistics on my Twitter feed. Here's one: The Nasdaq hitting the 5000 mark is a well-earned celebration. But it's up almost 900 points off the October low (4116.60). That's 21.7% in 4+ months.

When coupled with subpar breadth and overly bullish short-term sentiment (see Apple's (AAPL) rip higher in Jan/Feb, the Nasdaq was due for a pullback. And that's exactly what its been thus far. In investing, there are no rules or guarantees where to (or how far) a pullback will go. So to help with that, I like to highlight support levels to help myself better understand the amount of exposure I should have.

Below is a daily chart of the Nasdaq Composite. As you can see, the Nasdaq is retesting its February breakout. There are two support levels nearby that should tell us if this is a garden variety pullback or something deeper. The first is 4800, which marks the November/December highs and a lateral breakout confirmation level. The 50 day moving average also resides in that area. The next level is around 4750, which is where the breakout above the downtrend occurred. 

A deeper move would signal more caution for investors, as there are open gaps that may beckon at 4716 and 4547 (the December lows), along with the 200 day moving average.

Nasdaq Composite Daily Chart

Thanks for reading. Have a great week.

Here’s a quick video on what to expect after the trading resolution that took place last week.

P.S. I’m allowed to change my mind if the market says I have to.

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The market makes a habit of fooling the masses.  That is how it works, always has and always will.  Seriously, how many have sat on the sidelines just the past 12 months focusing on the scary headlines.  This time a year ago all the rage was the coming ‘87 like crash.  

For this reason, I do my best to avoid any emotion in my trading and use quantified data and sentiment instead.  Last year, nearly all the studies I did suggested a big second-half rally was coming.  This wasn’t a popular call at the time to say the least.  But, by looking at past history, it helped show a guide for what might happen.  Many a year ago were saying margin debt was high and we were due for an ‘87 like crash because of this.  As you know now, that didn’t happen.  

Here’s a great example of how digging a little bit deeper can show surprising results.  

The PowerShares 100 Trust (QQQ) hasn’t been red since August 12.  First off, the QQQ is an ETF based on the Nasdaq-100.  So these are the largest stocks listed on the Nasdaq in a one nice big basket.  

The current streak is 10 trading days in a row the QQQ hasn’t closed negative.  I find a few things interesting about this.  Two weeks ago all the talk was how that 10% dip we hadn’t seen in three years was coming.  Sentiment had moved to a full blown panic in a lot of cases on just a 4% S&P 500 (SPX) dip.  

Also we heard a lot how weak breadth was in the QQQ.  Facebook (FB) was about the only stock leading it anymore.  Breadth looks at how many stocks are going up along with the Index.  It measures internal strength.  Well, all we’ve done since these warnings is see one of the best streaks in the history of the QQQ.

Here’s where the current streak ranks all-time.

Now for the best part.  I went back and looked at the top three streaks and found what the QQQ did after 10 straight days without being red.  The results were what I’d call surprising.  Most would probably guess the near-term is weak.  None the less, the returns are simply stellar.  

Significantly better results across the board on all timeframes.  How about that?  Sure, there are just three occurrences and you could argue this is totally random.  Still, to me, this much strength usually results in more strength.  

Here are the three times it made it to 10 days and the returns after.

So today if you see a talking head on tv or social media say the QQQ has gone two weeks without being red and this is bearish, you can know that the quantified data simply doesn’t back that up.

The debate underway over Bitcoin's legitimacy and future viability is a fascinating one, but there's a far more interesting question at the moment: is Bitcoin's value experiencing a speculative blow off?  

Bitcoin has traveled this path before.  Between January and April 2013, BTCUSD (that's the ticker symbol for Bitcoin expressed in US Dollars) rose +2500%, and then gave back +81% of that in 7 days.  

6 months later in late September, another BTCUSD moonshot began.  The magnitude of the move higher isn't nearly as spectacular; but in raw dollar terms there's no comparison.  

The NASDAQ Composite (COMPQ) knows a thing or two about bubbles and blow off phases.  In 1998-2000 the tech-heavy index soared higher on the wax wings of absurdly-valuated, zero-profit, bing-IPO-ramped Internet companies, burning out only after adding 275% in 18 months (see the first chart above).  Between October 1999-March 2000, the COMPQ tacked on +94%. This almost straight-line up was a manic buying episode that had entirely unraveled 6 months later.  It easily stands as one of the best examples of a trend blow off phase in modern financial market history.

Now check the current stats on Bitcoin (second chart, above):

+600% in 20 weeks.

+315% in 7 weeks. 

Note COMPQ's timeline unfolds over months; BTCUSD has accomplished something far more impressive in roughly the same amount of weeks.

Don't skip over this point: a decline comparable to April's in BTCUSD would take it back below $100 from its present lofty perch above $450.  

Not possible?  Tell that to the guy who bought at $266 on April 8, only to watch his position dwindle to a closing price of $68.36 on April 15.  

Near-vertical climbs like these are difficult to comprehend: nothing about the bottom-to-top relief they cover or the speed and intensity with which it all occurs seems rational.  And in retrospect, the consensus is that little of it is. In these periods, almost any fundamental narrative or value - however off-the-rails it goes - will find an eager and amenable audience. Given the mad forces at work (and this goes for all "bubbles"), though, calling a top in BTCUSD would be to participate in the same blinded fervor goading it higher.

You don't need to know the top in BTCUSD to understand the dynamic that has brought it so far, so fast from the bottom.