February 8th, 2024

Will there be a divergence until March? We continually observe a disconnection (divergence) between the RTY and the NQ. RTY cannot sustain a rally, and the NQ fails to hold a break. I expressed on X last night that it’s difficult to anticipate a trend shift in February. Most trends initiated in January continue at least until March before any significant mean reversion takes place. I learned my lesson last week in ES when I switched from a long swing position to a short one. It left me slightly bewildered, but I’ve regained perspective, viewing the tape from 10,000 ft and acknowledging that the years seldom change in February. I anticipate this divergence, where RTY remains near lows and NQ continues to surge higher, lasting until March.

So, how do we trade it? Short the weak RTY. Buy the Strong NQ. Yesterday, I purchased some out-of-the-money puts puts in RTY set to expire at this month’s end. If the RTY market continues to trend lower, the trade will take care of itself and will do little adding or scaling out. If we get a daily close above 1976 (YTD VWAP) I will cover the puts and re-evaluate.

Regarding ES and NQ, I currently see no reason to oppose these rallies. Throughout the day, the tape has become more restrained with diminished volatility and volume. I perceive it as a ‘wait-and-see’ market where you favor buying on dips using a short term day trading strategy.

One potential factor that could disrupt my divergence theory extending to March is the 10 YR. With the 10 YR at 4.13% this morning, a shift above the recent peak of 4.16% could notably impact RTY. Perhaps, it might also attract the notice of ES longs, resulting in some selling hitting the tape. We’ll see…

Small and Smart.

Cheers, DELI