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S&P 500: Glaring Intermarket Divergence, Watch the Nasdaq 100

S&P 500: Glaring Intermarket Divergence, Watch the Nasdaq 100

What’s inside:

  • Glaring divergence among major US indices
  • Nasdaq 100 carving out a head-and-shoulders top, but no trigger yet as support has yet to break
  • Will the S&P 500 follow the Dow and Russell 2000 or the Nasdaq

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In recent sessions, we have seen significant divergence among the US indices. The Dow and Russell 2000 (small-caps) have risen to record heights, while the Nasdaq 100 has been trading back towards its worst levels of the month. The S&P 500 is holding in between.

The divergence is glaring and providing mixed signaling. Generally speaking, negative divergence among indices during an up-move is not a sign of a healthy market. But at the end of the day, though, price action in the S&P 500 is generally what matters the most given the index’s broad representation of large-cap stocks. However, divergence does beg the question: Will the S&P follow the way of the Dow and Russell and play catchup, or is the Nasdaq flashing a warning sign of things to come?

Intermarket divergence

Created with Tradingview

Let’s take a look at the Nasdaq 100 since it is providing the clearest technical formation. The 100 is in the process of carving out a head-and-shoulders pattern, and should it trigger its neckline it is likely the Dow and Russell will quickly reverse and the S&P 500 will rollover as well. Conversely, the neckline could hold, as it is still considered support until broken, and the H&S formation will never come to fruition. If this is the case, then we may very well see a rotation into the tech-heavy index and the S&P. It's all dependent on how things play out with the neckline.

Nasdaq 100: Daily

Created with Tradingview

S&P 500 levels and lines...

S&P 500: Daily

Created with Tradingview

All-in-all, we will want to keep an eye on the Nasdaq as it’s quickly closing in on the danger zone. How it handles neckline support will likely prove a critical sign of which way the next broad market move wants to unfold. We’ll update shortly as market develops unfold. Join me tomorrow at 10 GMT for a look at short-term charts and potential trade set-ups.

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---Written by Paul Robinson, Market Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.