Profit Taking And A Pivot Is The Preferred Path Higher

Markets are rallying after traveling down the road and flirting with disaster (a little 80’s southern rock reference) at 10,250. We thought the NASDAQ was poised to head higher but expected a little more of a fight from sellers as the index approached its 50-day moving average and technical resistance. But bulls just broke on through to the other side (70’s psychedelic rock reference) of technical trouble.

The next floor up is 11,250 and the top floor, for now at least, will likely be the 200-day moving average of 11,634 and falling, which also coincides with what could be a strong level of resistance. As you will see on the chart below, 11,500 was support before the NASDAQ started its descent in late August. It’s also the same place advances were thwarted three times between the middle of November through mid-December.

Eleven-five should prove to be a much harder door to kick down than 11,000 proved to be.

Here is what we would like to see happen before the NASDAQ takes on the challenge of slaying its 200-day average and durable resistance.

Profit taking may bring the NASDAQ back to 10,750ish, maybe 10,500, but no lower. Then rally beyond where the index pivoted to profit taking, achieving a short-term higher cycle high. A jagged pattern of higher lows and higher highs would give us confidence that a new trend has taken hold and not just another bear market rally before the bottom falls out, again.

NASDAQ

Like last week, we’ll continue to hold and not add anything new until an uptrend is confirmed. That has not happened yet. If/when the NASDAQ starts to close in on 11,500 without a bout of profit taking, investors might consider selling underperformers and reallocating the cash following a selloff with a pivot higher. On the other hand, if the NASDAQ takes some off the top soon, without going below 10,500, investors might consider an index fund like Invesco QQQ Trust (QQQ) on the next turn higher.

SECTOR VIEW:

A mixed bag of sectors and industries heading to the top of last week’s performance leaderboard, but tech related exchange-traded funds (ETFs) were the most common. Marijuana – again – biotech, medical devices, green energy, oil and gas also joined in on the fun of going higher.

Much like our picture view of the NASDAQ, we’d like to see a pullback in the top performing sectors/industries before staking a position in an ETF. If/when the index confirms a new trend higher, we’d expect to see tech and healthcare lead the way.

STOCK VIEW:

Although momentum is on the upside, we believe it’s too early to be confident enough to invest in single names. That’s because we want a selloff and a pivot point higher. We use the pivot point higher to identify and limit downside. Otherwise, the current exit point is NASDAQ 10,250, or 750 points lower than where it is today, which is more than we are willing to accept in the current environment.

Rich Meyers
Investing Trends