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S&P 500, Nasdaq 100 Ripe for a Healthy Correction After Reaching Overbought Levels

Published 07/10/2024, 02:58 AM

Stocks finished the day mostly lower yesterday, with about 100 more stocks down than up for the S&P 500, even though the index finished flattish.

The market has been relatively flat, with some metrics hitting certain levels of what seems like stupidity. One has to wonder how far things will be pushed before the rubber band snaps back the other way.

Indexes Setting Up for a Correction?

The NASDAQ 100, for example, has now traded above the upper Bollinger band four out of the 5-weeks and has an RSI of over 75 on the weekly chart.Nasdaq 100-Weekly Chart

The NASDAQ 100 also reached a 100% extension off its March 2020 lows when measuring the length of the latest move higher.

It doesn’t have to mean anything; we have seen similar measurements that haven’t mattered at all. But one that we can pay some attention to.Nasdaq 100-Daily Chart

Two weeks ago, the S&P 500 had a nice setup for a reversal, but the investors blew it off, and it managed to push even higher, putting the RSI on the weekly chart to almost 77. It is now at the very upper end of the range of what could be completing a rising wedge that we have been tracking for several weeks.S&P 500 Index Weekly Chart

This has allowed the S&P 500 to rise to a 78.6% extension off its March 2020 lows.S&P 500 Index-Daily Chart

You have even seen the 1-month implied correlation index reach historic lows, falling to around 4. That is well below the prior all-time low seen in late 2017 or early 2018.1-Month Implied Correlation Index

Wingstop - Canary in the Coalmine for the Market?

Meanwhile, Wingstop (NASDAQ:WING) could be a canary in the coal mine —or the chicken in the coal mine, for that matter. As noted a few weeks back, Wingstop appeared to be forming a rising wedge pattern. Apparently, that rising wedge pattern broke during my time away, and it has led to a small drop over the past two weeks or so.Wingstop Inc Daily Chart

The big question will be what happens for the WING at the 10-week exponential moving average because that has been a support level for the shares. A break of that moving average would signal a break in trend.Wingstop Inc Weekly Chart

We care about Wing because, for some reason, it has been a very good proxy for where the S&P 500 is going next. If Wing is rolling over, then it is time for us to pay some serious attention. Wing, more than anything, seems to represent risk sentiment.

Wingstop Daily Chart

Because somehow it even leads the SMH and the last time I checked, Wingstop was a chicken wing chain, and although I have never eaten at one because I haven’t come across many, I’m pretty sure they have nothing to do with AI or selling GPUs.

Wingstop-Daily Chart

The one thing WING does have in common is that it is a risk asset. This seems to suggest that the rise in valuations across the market has much more to do with excess risk-taking than anything else. So, at this point, we have to wait to see if the rubber band snaps back or breaks altogether.

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