After Monday’s trading day, the NASDAQ is doing its rendition of Bob Dylan, knock, knock, knocking on resistance’s door. The index slammed up against 12,250 for the fourth time since early February. In technical analysis terms, it’s a quadruple top.
It’s generally believed, the more times an index/stock/ETF stops at essentially the same price, the more difficult it is for the underlying investment to hammer its way through to the other side. In this case, if the NASDAQ slips in the next day or two without laying waste to 12,250, the weakness will attract sellers.
On the other hand, if the NASDAQ can power its way past 12,250 convincingly, say above 12,300, then the quadruple top becomes the new floor, and probably a durable one. If the current ceiling flips to the new floor, that will likely attract buyers, probably aggressive buying as bulls seek a new top.
Looking at the weekly chart, the most probable next destination would be 13,000. The weekly chart also shows an impending clash between resistance and a rising trend line connecting bottoms from the start of the year.
From our experience, the static line, in this case 12,250 resistance, usually loses to the dynamic moving line, in this case, the rising line of support. It’s not always the case, nothing ever is. This week’s Federal Reserve announcement regarding interest rates will likely be the determining factor.
If Jerome Powell and Company raise rates and say that’s it, we are done. Then it could be stocks to the moon (really 13,000ish for the NASDAQ) as the meme players say. Wall Streeters will think of two moves down the line, anticipating rate cuts if the economy continues to cool as it did with the most recent GDP numbers.
The other side of the story is that the Federal Reserve believes inflation remains too hot and announces they plan to continue raising interest rates. If so, the NASDAQ’s downside should be limited to somewhere between 11,700 and 11,500, its 200- and 50-day moving averages respectively.
Although it’s our opinion that the NASDAQ is more likely to run higher than lower, we’ve been around long enough to know that the market will tell us when the time is right. So, we will wait for resistance to become the new floor before making the let’s go call.
Index investors might consider Invesco QQQ Trust (QQQ) if/when the NASDAQ closes above 12,250 or if it slips to support around 11,700-11,500.
In a positive sign, QQQ outperformed SPDR S&P 500 ETF Trust (SPY) for the first time in a while. Normally, it’s bullish when the NASDAQ leads the way. In a negative sign, both index funds were in the top 10 with the NASDAQ ranking number four.
Communication Services Select Sector SPDR Fund (XLC), ETFMG Alternative Harvest ETF (MJ) and Technology Select Sector SPDR Fund (XLK) were the trio that topped QQQ.
If we’ve made the correct call and the NASDAQ moves beyond its quadruple top, investors might want to focus on leading technology exchange-traded funds, like XLK, as they tend to be the best performers when the NASDAQ is hot.
As hard as it is, we must remain on the sidelines here until we get the go signal.