Papercuts hurt, but the pain doesn’t last long because they usually aren’t deep. We’ve been calling for a dip to complete our anticipated 1-2-3 pattern, which is the path with recent bouts of profit taking. Leg 1 is the first draft down, leg 2 is the initial recovery, leg 3 is the second wave of selling that pivots higher than the bottom of leg 1.
Leg 3 happened last week with the NASDAQ and it wasn’t deep. Like a papercut, it hurt for the moment and then forgotten. Now the healing begins. The NASDAQ made its way past resistance and might be on the way to testing its recent high.
That’s when things can get interesting. If that’s the correct call, it will be the third time in 2021 that the index hit 14,200ish. Sellers greeted the index the previous two times the NASDAQ made it that high. Another selloff at 14,200 would be a negative and could lead to a straight up correction.
The other side of the coin is the potential for an aggressive rally. In technical jargon, it’s called a double top. Think of it like unclogging your drain. When the clog breaks, the water rushes out of the sink. When resistance (or support) breaks, Wall Street’s computer programs recognize the clog has been cleared and prices tend to rush in that direction.
Index investors might consider an exchange-traded fund like Invesco QQQ Trust (QQQ) if the NASDAQ is indeed headed for its 52-week high. Just remember to be cautious around 14,200. If the index reverses course with oomph at that level, you might consider exiting the trade.
There was a huge push up in energy ETFs last week as defensive sectors took charge. Oil and gas were joined by real estate, food, and aerospace as the best performers. One tech ETF made our leaderboard, iShares North American Tech-Multimedia Networking ETF (IGN). Since our models suggest the NASDAQ could be on a journey back to its peak, sector investors might focus on tech. In which case, IGN could be a good fit for the next few weeks. Much like QQQ, if traders take prices down at the top, consider dumping the trade.
F5 Networks, Inc. (FFIV) got rocked recently and appears to be on the road to recovery. Shares dropped from $205 to as low as $175ish since late May. Investors pummeled the software company following its latest earnings report. Shares gapped down from $205.34 on April 27th’s close to $189.85 for the open on April 28th. IF F5 Networks can close above $191, it could begin the process of closing the gap down and find its way back to $205. On the downside, we’d consider cutting bait with a close below $180.