Stocks are on the rebound. That’s good but is it enough to trigger an extended run higher? The NASDAQ tailed off early last week, ticked higher to the last two trading days, and added to gains to start this week.
Now, we have a pivot point at a higher low. That is step one in the process of initiating a new trend, up in this. However, confirmation is a two-step process. The second step is for the NASDAQ to achieve a higher high than the most recent peak (see on the chart below). If Wall Street can complete the two-step dance, then step three could be a test of the recent top at 14,400.
Investors still need to be vigilant if the tech-dominated index passes the second test by breaking resistance at 14,150. Unfortunately, the possibility of a major reversal pattern known as a head-and-shoulders is in play until the NASDAQ closes north of its July 31, 2023, closing price of 14,346.02.
While the risk of trouble remains as long as the NASDAQ is short of the July high, there are plenty of step off points should the index’s fortunes turn south. A close below 13,600 would be the first warning flare. A brighter fire burns with a close under 13,400. The siren rings loudly with a close below 13,200, which essentially coincides with the neckline of a head and shoulder. A line we DO NOT want to cross.
For now, we feel it would be wise for investors to wait and see if the NASDAQ can get the better of 14,150 to get halfway bullish. Although, it would be equally wise, in our view, to keep a tight leash, especially if the next wave of selling takes its price below 13,500. Full bull arrives with a close above 14,450ish.
It’s a little concerning that SPDR S&P 500 ETF Trust (SPY) barely outperformed Invesco QQQ Trust (QQQ) last week. The stock market is usually strongest when the NASDAQ leads the way, as it did through the recent rebound. Right now, the difference is not enough to put the current rally in doubt, but it’s definitely a yellow flag worth reviewing next week. A second week of underperformance for QQQ would be concerning.
ETFMG Alternative Harvest ETF (MJ), exploded higher on news of the SAFE Banking Act, which could make it legal for merchants and banks to do business with weed companies. Politically, expect pot to be a big issue in the 2024 presidential campaigns to entice younger voters and smokers to vote.
Energy was next up behind marijuana as winners last week. However, black gold is off to a slow start with tech stocks in style. That being said, the longer-term outlook for the price of Oil appears to favor bulls. Investors with an interest in the commodity might consider Energy Select Sector SPDR Fund (XLE) on a pullback to $89 and even more so at its 50-day moving average $86.31 and rising.
We’ll remain on the individual stock sidelines until the NASDAQ confirms the current trend with a close above 14,150.