Traders might consider Monday an inside day as it traded within the range of the last five-days’ high and low. However, we see the playing field differently. The technical landscape appears to reveal an opportunity to get into the market. Not necessarily because stocks are certain to go higher, but because we can limit downside risk with some degree of comfort.
We also believe the odds of the NASDAQ going higher outweighs the chances of another round of wave selling. The tech-heavy index rallied to within arm’s lengths of its 200-day moving average before traders took some short-term money off the top. The selling only lasted a couple of days with the index setting a technical floor around 14,250.
Monday’s run higher pushed our short and intermediate-term momentum indicators into an upward trajectory with the overall model reading bullish. At the same time, the NASDAQ’s relative strength index resumed its trend higher and has plenty of headroom before reaching the overbought zone. The momentum and RSI setup tends to be positive for prices, based on our experience.
Here’s the game plan.
The NASDAQ could run into selling once it hits its 200-day moving average. If, like The Doors, traders can break on through and close on the other side of 14,733, it might trigger a wave of algorithmic buying that could push the index as much as 500 points higher.
On the downside, if the 200-day benchmark is too tough a barrier to crack, then the NASDAQ should catch support in the neighborhood of 14,250. Traders that play it tight might consider cutting losses if the NASDAQ closed below the first line of support. More patient types might hold in there until the NASDAQ closes below its 50-day moving average of 13,769.
Investors are in a good position now because we have reasons to believe prices are likely to move higher but, if it’s a head-fake, we know our downside targets. Index investors might think about Invesco QQQ Trust (QQQ), which tracks the daily performance of the NASDAQ 100. Remember to keep in mind the key technical points outlined above.
Biotechs, healthcare, interest rate-sensitive industries, oils and gas were the best performers on last week’s industry/sector leaderboard. ALPS Medical Breakthroughs ETF (SBIO) was the top performer and could have more room to run. SBIO bounced around its 50-day moving average before committing higher on Monday.
Once the biotech ETF gets past limited resistance at $36.50ish, it has room to run to the 200-day average of $42.02. On the downside, ALPS Medical Breakthroughs should find solid footing at $33. Investors might consider cutting the cord if SBIO closed below $33.
We want to stick to the theme of keeping downside to a minimum because the geopolitical picture could change for the worse at any moment. We hope not, but we do need to act with the current backdrop in the forefront of our trading minds.
Cerevel Therapeutics Holdings, Inc. (CERE) is the number two holding in SBIO and has been trending higher since the end of February. The current trend line should hold shares of the biotech above $34. A close below $34 and we’d likely move on. It trades at $36.80 as we type.
CERE in on the verge of the golden cross. That’s when the 50-day moving average crosses from below to above the 200-day moving average. It’s not foolproof, nothing is, but the technical buy signal is considered bullish.
The golden cross and a close above $39ish might be enough to push Cerevel Therapeutics Holdings into the mid $40s.
The NASDAQ presents a somewhat predictable picture. Get past the green line and the 200-day mark and it could be in for a solid rally. Meanwhile, the red line and 50-day average below should provide plenty of support.