As much as we’d like to get away from our ongoing shampoo market theme, the NASDAQ continues to go through the same wash, rinse, and repeat cycle. The reason we keep running this Groundhog Day cycle is because the NASDAQ can’t get too far away from a relative strength index reading of 70, which is where overbought conditions begin.
The index flattened out a bit and formed a small box with borders of 14,000 on the bottom and 14,500 at the top. Even if bulls get some courage and take the NASDAQ past resistance at 14,500ish, they’ll attract sellers as the index moves into over extended territory. And that puts the index right back into the pattern of run up, go overbought, profit taking – wash, rinse, and repeat.
Once again, we are right back where we were a month ago, ride the market higher, sell underperformers or short-term holdings if/when the NASDAQ’s RSI tops 70, wait for a wave of profit taking and buy leaders on the dip.
However, our concern is that when the shampoo pattern ends, it will likely result in an extended selloff more than a major push higher, simply because the NASDAQ is restrained by elevated prices. Unless some completely unexpected catalyst comes from out of nowhere (a fed rate cut?), bulls can only have so much stamina to hold off an inevitable swing lower. The question is when?
For now, index investors might consider waiting for the NASDAQ to peel back to 14,000ish and possibly adding Invesco QQQ Trust (QQQ), so long as the index doesn’t close below the support level.
QQQ continues to outperform SPDR S&P 500 ETF Trust (SPY), which usually means stocks are likely to continue rising. That means the market might stay on the same yo-yo path.
As we’d expect, technology sectors/industries loaded up the top end of our performance leaderboard. Interestingly, three banking exchange-traded funds (ETFs) managed to stay at the bottom end of the top 10.
Once again, ETFMG Alternative Harvest ETF (MJ) is flirting with breaking out of its buzzkill. MJ closed out the first day of the news week at $3.30. It hit the technical break wall in early July, only to fall back. The weed fund has played this Lucy and Charlie Brown football game multiple times, running up for the kick only for bulls to pull the ball with investors swinging and missing. If MJ can close above $3.30, then $3.50 is the only technical trouble between here and the declining 200-day moving average of $3.98.
Our trading theory is that the NASDAQ is pressing against and overbought RSI reading, once again. Waiting for a dip has been the best practice since June and that’s what we will do again. Individual stock investors might consider adding to their strongest performers after the next rinse cycle.