The market was closed for the Juneteenth Federal Holiday. Last Friday, the NASDAQ and the rest of the major indexes had a down day. Now, we’ve mentioned in the previous two newsletters that the NASDAQ travelled into overbought territory based on its Relative Strength Index (RSI) topping 70.
The index carried on in elevated territory, extending out to cycle highs, seemingly unfazed by its 70 plus RSI reading. While Friday was a red day, the NASDAQ remains north of a 70 Relative Strength score at 73.29.
As we mentioned last week, profit taking at these levels is actually healthy and what investors should be cheering for. Sort of like a rainy, stormy day that interrupts a string of beautiful, sunny, warm, and dry summer days. It’s healthy.
At this point, we don’t expect to see a major downswing. Instead, more of a buy the dip opportunity. Although, we wouldn’t be surprised to see the dip take a week to 10 days to bottom out. The initial level of support should be at 13,500 for the NASDAQ, according to our technical take, but we don’t believe that will be enough rain, more like a sprinkle. Thirteen, two-fifty to a little under 13,000 looks like the target zone, in our opinion. Maybe, 12,750 to the max, which would also likely line up with the rising 50-day moving average in the next five to 10 days of trading.
If we’ve made the correct call here, investors might consider cost averaging into Invesco QQQ Trust (QQQ) as it approaches the support levels mentioned above. However, if the NASDAQ resumes its climb when the market reopens following the three-day weekend, the rubber band could stretch to a breaking point. That would not be healthy in our view.
In a hint that the NASDAQ might not be quite ready for a pullback, QQQ outperformed SPDR S&P 500 ETF Trust (SPY). It regained the leadership role after two weeks in the trailing position. It’s been our experience that prices are more likely to head higher when the NASDAQ pulls the cart instead of riding in while the S&P does the pulling.
Despite the NASDAQ taking charge, tech stocks were not the dominant performers last week. A trio of technology-related sectors made the top 10 on our sector/industry, exchange-traded fund (ETF) leaderboard with ARK Next Generation Internet ETF (ARKW) securing the second spot.
Meanwhile, iShares U.S. Medical Devices ETF (IHI) was #1 with SPDR S&P Health Care Equipment ETF (XHE) and SPDR S&P Pharmaceuticals ETF (XPH) also holding down two of the top eight positions. XPH might be the one with the most upside but does have some technical resistance overhead. It, and the others, would likely take a hit if the NASDAQ does move lower.
For now, we’d probably take a wait-and-see approach before adding new sector/industry ETFs.
With our view that the odds favor stocks most likely moving lower, we won’t add any ideas here.