The stock market has given an equal measure of thorns and roses that have traders and investors searching everywhere for clues to know if this was the bottom. If you want to take the best advantage of going long, knowing relative strength and market structure is key to being a brilliant trader.
This report examines the four biggest U.S. stock market indexes: the S&P 500, NASDAQ 100, Dow Jones, and Russell 2000, to identify where the greatest opportunities may be.
The S&P 500: Testing Key Levels
The S&P 500 is the index by which many fund managers are judged. It has recently approached its 200-day Simple Moving Average, an important technical level which acts as both potential resistance and support.
Observations
- The index has just had a strong rally to positive news catalysts.
- It is currently testing resistance at the 50-day Simple Moving Average with the 100-day SMA acting as the next barrier.
- Indicator action is positive, offering some bullish validation.
Trade Considerations
- A break below the 200-day SMA may give more strength to a technical trade long.
- Consolidation at present levels may be followed by an abortive breakout or retest of support.
The S&P 500 does look promising; however, traders should exercise caution unless clearer validation comes through.
NASDAQ 100: Leading in Relative Strength
The NASDAQ 100, represented by the ETF QQQ, stands out as the strongest performer among the major indexes. Unlike the S&P 500, it hasn’t retraced as deeply, signaling stronger relative strength.
Key Observations
- The index remains well above its 200-day SMA, reflecting bullish momentum.
- Resistance levels are present, but the shallow retracement indicates buyers’ control.
Why NASDAQ is Favored
- The lesser retracement during bearish moves suggests resilience.
- For longer positions, the NASDAQ 100 provides a better probability setup because it has stronger relative strength compared to the rest of the indexes.
Dow Jones: Relatively Weak Relative Strength
The Dow Jones Industrial Average has been lagging, and it broke below its 200-day SMA. This break indicates a relatively more bearish market structure compared to the S&P 500 and NASDAQ 100.
Observations
- The index is trading around a horizontal support level but has yet to touch that level precisely.
- A deeper pierce below the support level may provide a better buying opportunity.
Dow Buyers Problems
- The market structure is not that friendly, and this is in a weak relative strength.
- A poor margin in the support levels results in decreased possibilities for a strong bounce back.
Under its current configuration, the Dow may not be a good long trade candidate at this point in time.
Russell 2000: A Bearish Market Structure
Small-cap stocks, which the Russell 2000 (IWM) presents, is the most bearish of all four of the larger indexes. The index is not only beneath its 200-day SMA but is also relatively weak.
Observations
- The slight break below horizontal support from historical lows offers a scenario that traders favor when seeking high-probability entries.
- However, the weaker relative strength to the downside diminishes its appeal for long trades.
Aggressive Traders
- The subtle penetration below support could be an attractor for contrarian traders but the overall bearish trend is cautionary.
Relative Strength in Determining Market Opportunity
Analyzing these four indexes from the standpoint of the four major indexes, relative strength is a determining factor for choosing which market to take the long position:
- Most Bullish: NASDAQ 100
- Moderately Bullish: S&P 500
- Bearish: Dow Jones, Russell 2000
More Tools to Help with Analysis
- Confirmation of daily setup with the 3-day chart end.
- Weekly charts are used frequently, but they are not as good for detailed fractal analysis.
Cycle Indicator
A proprietary cycle indicator can pinpoint the best trade setups if optimal entry and exit points are shown.
Conclusion
As the stock market approaches what could be a bottom in 2023, traders must focus more on relative strength and price structure to identify the best opportunities.
- NASDAQ 100: Most promise. Shows impressive relative strength and bullish momentum.
- S&P 500: Decent setup but requires clearer confirmation for optimal trades.
- Dow Jones and Russell 2000: Lag significantly, hence less attractive for long positions.
The tools that are to be used include the moving averages, fractal confirmations, and the cycle indicator. This will give better decision-making in trading and even navigate the uncertain markets.
