Stocks have definitely pivoted higher. The NASDAQ broke its downtrend line and rallied beyond resistance at the 50-day moving average with a bullish MACD crossover. The index has one technical test to pass, however, before confirmation of the current bull run. Wall Street needs to carry the tech-laden index past and finish above 14,500ish, topping the July high.
It’s a big test, like a final exam worth 40 percent of the full grade. A couple weeks ago, we talked about the possibility of a head and shoulders pattern emerging. Potentially, we have a left shoulder and the head in place. If the NASDAQ fails to conquer and close above July’s highwater mark, the right shoulder could form.
We believe it could be difficult for the street to get past the upper level of resistance because it would require the NASDAQ’s Relative Strength Index (RSI) reading to top 70. That’s where things are considered overbought and tend to attract sellers.
Head and shoulders are considered trend reversal patterns. Meaning if stocks are rising and bullish, the famous technical pattern indicated prices could turn the other way becoming bearish. When analyzing head and shoulders patterns, the neckline becomes the lynchpin. If it gets pulled and the underlying investment closes below the neckline (see the chart below for an example), that’s when the trend break is triggered, and investors can anticipate prices heading in that direction.
In the current case, 13,250ish is the neckline number investors need to keep an eye on if the NASDAQ cannot achieve a new high. So, this is the storyline investors need to pay attention to. The race is between the index closing above 14,500 or closing below `13,250. And it is a race for all the marbles, so to speak.
A new high means the NASDAQ could ultimately put 16,000 into play. A neckline break and the index would have a reasonable shot at hitting its 200-day moving average of 12,296 and rising. It last traded at 14,031.81. As you can see, a roughly 2000-point swing either way might be in play from here.
With that much potential volatility in the cards, it might be best for investors to be in wait-and-see mode to see which side prevails.
SECTOR VIEW
Invesco QQQ Trust (QQQ) handsomely outshined SPDR S&P 500 ETF Trust (SPY), which is not surprising considering stocks had a good week. It also means that prices could continue to rise in the immediate future. However, it’s important to keep the possibility of a reversal in mind, like we outlined above. We can see the clouds gathering on the horizon, but that doesn’t necessarily mean it’s going to storm, but we do need to be prepared just in case.
ETFMG Alternative Harvest ETF (MJ) exploded last week with the weed exchange-traded fund (ETF) gaining more than 24 percent. It’s likely due for some profit taking. A pullback to $3.30 could be the first level of support and possible entry point for investors looking for exposure to the marijuana sector.
Technology owned most of the remaining spaces in our top 10 behind MJ. We’d anticipate ARK Next Generation Internet ETF (ARKW) to continue to shine as long as the NASDAQ continues higher. But again, danger lurks for the NASDAQ as we outlined in our market analysis.
STOCK VIEW
Investors might consider adding to their current technology holdings, especially their top performers. Just keep the possibility of a reversal in mind, compliments of a potential head and shoulders.
Rich Meyers