The NASDAQ definitely broke its downtrend last week. As you’ll see on the chart below, the index cut past the descending trendline connecting recent tops. Ordinarily, the move out of a trend is the first sign of a potential reversal or pivot. So, if stocks were headed south, as they were, and the trend is broken, it can signal a switch from bearish to bullish in the short term.
Usually, a reversal in form is followed by almost immediate follow through. However, Wall Street appears to be uncertain about which direction it wants to go right now. The NASDAQ has flattened out since the potential change of direction. It has established a small, 350-point trading range, boxed in by 12,013.99 at the top and 11,666.85. The tech-dominated index finished in the red Monday down 55 points, closing closer to the bottom of the range than the top.
As long as the NASDAQ stays above the bottom of the box, which roughly corresponds with its 50-day moving average, then the odds favor higher prices in the days ahead. That being said, moving from above to below a key benchmark like the 50-day mark is more significant than run-of-the-mill support failing. It becomes doubly more concerning if technical support and widely recognized moving averages like the 50-day fall apart simultaneously.
That is our concern right now. Especially since another key number, the 200-day average is not that far below at 11,385. Break all three, and it would quite possibly equal troubled times ahead.
As it stands, investors need to pay attention to 12,000 and the 50-day levels. It’s our opinion that support should hold, and the NASDAQ takes out 12,000 before falling out of the bottom of the box, but we don’t like to jump the gun here.
Index investors might consider adding Invesco QQQ Trust (QQQ) if the NASDAQ closes above 12k. On the other hand, booking some profits might prove to be a smart choice if support doesn’t hold.
Technology was the dominant force for the second week in a row. Communication Services Select Sector SPDR Fund (XLC) was number one on our list, gaining 2.5% for the week. Invesco Dynamic Food & Beverage ETF (PBJ) was the lone tech name, not including QQQ, to land a top 10 spot that isn’t technology based. That’s kind of odd considering Food and Beverage are considered defensive and money tends to flow its way in times of uncertainty. Whereas, tech leads the way when bulls are most enthusiastic.
QQQ outperforming SPDR S&P 500 ETF Trust (SPY) gives us some confidence in our opinion that stocks as a whole are more likely to move forward than backwards. As we’ve said before, the NASDAQ is the Mary of the markets, where it goes the others are likely to follow.
We’ll wait for the NASDAQ to close above 12,000 and then add another idea here. There will be plenty of time and ideas to consider if the reversal is confirmed.