Equity Indices Likely To Come Under Pressure To Unwind Short-Term Overbought Condition

Margin debt rose to a fresh high last month and has a potential to keep rising in the next few months, but only if equity bulls manage to defend important support on the major indices in the imminent selloff.FINRA margin debt hit a new high in November, rising $30.7 billion month-over-month to $1.21 trillion. This was the sixth month in a row of trillion-plus in margin debt. From the April bottom of $850.6 billion, it is up 42.8 percent.Chart 1 uses a year-over-year change in the Nasdaq Composite, which is advanced six months, and a 12-month rolling average of margin debt. Historically, the two have a close correlation. Should it uphold, the recent uptrend in margin debt could continue for the next few months, and for this to happen, important support should be defended on the major equity indices. If this scenario comes to pass, the Russell 2000, which has a slightly higher correlation with margin debt versus its large-cap cousins like the S&P 500 and Nasdaq 100, likely builds on its most-recent momentum.Last week, the small cap index broke out of 2540s, where it hesitated for several weeks. Sellers again showed up at that level on Monday and Tuesday, but bids overwhelmed offers beginning Wednesday, reaching a new intraday high of 2596 on Friday, but only to then peak in the session’s opening minutes and close at 2551. Monday (this week) saw a repeat of that, as the Russell 2000 tagged its session highs in the very opening minutes, closing at 2531. The most recent up momentum followed aggressive defense of 2300 four to five weeks ago; this level represents major horizontal support (Chart 2). From small-cap bulls’ perspective, this is positive, but they have at the same time been unable to meaningfully build on this.As things stand, further weakness is the path of least resistance. There is major support at 2460s. More than a year ago in November, the Russell 2000 retreated after ticking 2466. Three years before that, in November 2021, it rallied to 2459 and reversed lower. This year, on 18 September, those highs were taken out, tagging 2470 intraday. After 2460s lies the must-save 2300. There are similar dynamics at play on the S&P 500, which peaked on 29 October at 6920. The subsequent drop brought the large cap index to 6522 by November 21st before the bulls took things under control.On the 5th (this month), the index reached 6896. On Wednesday through Friday last week, bulls kept attacking 6900, but to no avail, with Thursday’s 6903 less than 17 points from the all-time high from 29 October. A lower high is now in place (Chart 3).Yesterday, the S&P 500 came under slight pressure to close at 6817. The 50-day is only 53 points away, and a test of the average looks imminent. During the October-November selloff, the 50-day was breached, with the index remaining underneath for only six sessions, even as the bulls defended horizontal support at 6550s. They may not be as lucky if a second test occurs soon. Over on the Nasdaq 100, the 50-day has been breached, closing yesterday at 25067 versus the average at 25209.Most recently, the tech-heavy index struggled at 25800s for a few sessions, including last Wednesday’s session high of 25835, which was decidedly lower than the all-time high of 26182 posted on 29 October (Chart 4).From that high, the Nasdaq 100 quickly gave back 8.9 percent through the session low of 23854 on 21 November; the 50-day was also breached back then, but only for six sessions. This time, too, the index is likely to come under pressure right here and now, as the daily overbought condition gets unwound. Further, the daily lower Bollinger band – flattish the last 15 sessions – lies at 24173, which is near the November 21st low. Should the index decide to test that low, it is a must-save. The 200-day – still rising – will not be tested until 22621; the index has remained above this average the past seven months.More By This Author:Indices Rally Toward Oct Highs Ahead Of FOMC MeetingSurging Rate-Cut Hopes Combined With Defense Of Support Led To Last Week’s RallyBulls Hope To Rebuild Momentum On Fri’s Intraday Reversal