How quickly things can change.
Last week we wrote that the NASDAQ was due for some profit taking as the index scored a Relative Strength Index (RSI) score or more than 70. We thought the NASDAQ would slip to around 12,750, which it did to close out last week, but then the index gapped down to start the week and closed down nearly 324 points.
Monday’s selloff may have created some technical damage and put the recent rally in jeopardy. The NASDAQ suffered a negative MACD cross-under where the short-term moving average fell below the longer-term number for the first time since late June.
The last time we saw this technical “sell signal” was in the beginning of April. Afterwards, the NASDAQ fell roughly 3,000 points, from 13,500ish to 10,500ish. A similar drop would mean the markets slip back into a Bear Market and could put the mid-June lows to the test.
Nobody wants to take that test.
For now, we hope the NASDAQ catches support at 12,250. If not, then the 50-day moving average of 11,832.60 and rising becomes the most logical destination.
Upside could be limited by Monday’s gap down. The NASDAQ closed Friday at 12,708.22 and opened at 12,523.20 to start the new week. From our experience, the top of the gap (12,708) tends to act as resistance when stocks move higher. It attracted selling once and is likely to do so again. If/when Wall Street pushes beyond 12.7, then the 200-day average of 13,429.35 and falling will be another technical sticking point.
How quickly things change.
We went straight from profit taking to things better improve quickly or we could be in trouble within two days of trading. For now, we’d exercise caution before adding new money to the market. We’ll wait and see if the NASDAQ can resume walking up the stairs or if Wall Street has reversed course.
We’ll get some clarity as the Federal Reserve hosts a conference in Jackson Hole later in the week and Chairman Jerome Powell is slated to give a speech on Friday. Powell should outline how aggressive the Fed plans on being with raising interest rates. If Wall Street interests Powell’s language as “dovish” the selloff would likely reverse in a hurry. On the other hand, if the Fed Chair takes a no holds barred to beat inflation stance, stocks are likely headed lower.
Oil and Gas, Consumer Staples, Food and Beverages and Utilities were the top performers in the last week. Those are mostly defensive sectors that Wall Street turns to during tough economic times. People don’t stop eating/drinking or paying their utilities during recessions.
Much like the overall market, we’d stay away from jumping into anything new with the financial market firing warning shots to start the week.
There is no sense in adding anything here with the possibility of stocks taking a big dip if they follow the path of the last MACD cross-under.