NASDAQ-100 Fractal Dimension End-of-Trend Signal

In 2014, the NASAQ-100 is more likely to go sideways (or down) than it is to continue shooting upward. Here is a weekly chart from my Fractal Stock Grapher app. Look at the black arrow (click to enlarge):

NDX-FDI-Jan14

The arrow points to the extremely low level of the Fractal Dimension Index indicator (red line). What does that mean? It means that the QQQ’s rally has been freakishly straight up – a phenomena that is very unlikely to continue. It’s just not natural; like a sunflower with all of its seeds arranged in rows and columns instead of a spiral.

The last time that I posted an FDI chart was on February 14th, 2012. Back then, SPY’s chart looked almost exactly like the chart of the QQQ today:

FDI-SPY-02-14-2012

What happened next? SPY went sideways pretty much for the rest of the year. The red arrows on the next chart show where I made my call. The purple arrows show SPY at the exact same level nine months later:

SPY-FDI-2014-01-15

The moral of the story is that the FDI is an excellent indicator. If you are a bull, chances are that you will have an excellent dip to buy in the coming months, and chasing rallies might be hazardous. If you are a bear, chances are that you will have a nice reversal pattern, or two, to play this year, such as the double top on the chart (blue lines). And 2014 might be a very good year for mean-reversion strategies, as opposed to trend-following strategies.

In the short term, it wouldn’t be impossible for the market to make a moon-shot, blow-off top before it begins to consolidate or correct. Before getting aggressive, bears should insist on a large, blatant, reversal pattern on their charts.