It is a positive that the NASDAQ broke trend; however, the recent change in direction hasn’t been tested yet. If buyers maintain the upper hand the next time sellers try to take control, then there is a good chance that the worst of this cycle is over.
The test will likely take place in one of two scenarios:
1 – The NASDAQ will break out of the short-term trading box and close in on its 50-day moving average of 12,729.15. The technical benchmark will likely attract profit takers and push the index lower. As long as the NASDAQ closes above May 26th close of 11,740, it should trend higher.
2 – The NASDAQ drops out of the bottom of the box and heads lower. The key will be what happens when its price hits the previous, descending trendline. If the trendline proves to be a bouncing pad that attracts buyers, then a new uptrend would likely be confirmed.
If the trendline doesn’t provide support, the cycle closing low of 11,26.45 could be the last line of defense before another wave of selling would likely take control.
Right now, it’s a tough call on which option is the most likely. Relative strength is gaining while momentum appears to be weakening. Either way, we expect the NASDAQ to choose option 1 or 2 during the week ahead. Path number two is our preference because it sets a bottom that minimizes downside risk and would most likely play out faster.
If Wall Street chooses path number 1, then the NASDAQ could end up in a similar position that it is in today. Then, we’d be stuck in another 50/50 position where we would have to wait for investors to pick a side.
For now, as weird as it sounds, let’s hope the NASDAQ drops to the trendline and rebounds so we can re-enter the market with known, limited downside. It would also be the first confirmation of a new trend.
Oil and Gas moved their way back to the top of the performance leaderboard. The sector owned three of the top five spots. Overall, just nine sectors managed to find their way above water. Behind Oil and Gas, a couple of tech funds, a couple of biotech funds, and an aerospace fund filled out the top 10 performers.
After reviewing the sector charts, Oil and Gas are on the verge of being overbought, meaning there is risk for profit taking. The tech, biotechs, and aerospace exchange-traded funds are tracking the market. They go up and down in tandem with the overall market.
Tech and biotech ETFs are potential targets once the NASDAQ confirms a new uptrend.
After a couple of months of selling into rallies, we might be on the edge of getting back into individual stocks. We hope that we’ll have something in this space next week, but it depends on which option the NASDAQ chooses.