Stocks rebounded sharply to end last week and to start this week. However, more work needs to be done before investors turn bullish. Monday’s move higher, finished the process of closing a gap down in mid-September. Additionally, the NASDAQ’s 50-day moving average of 13,638 is just overhead, adding a layer of resistance just above the start of the gap down.
As you’ll see on the chart below, the NASDAQ has traded in a descending channel after peaking in mid-July. The upper boundary, connecting tops, is just a few days of trading from colliding with the 50-day benchmark, which could harden resistance at the level.
Inside the channel, you’ll see a series of lower highs followed by lower lows, the definition of a downtrend. From our technical point of view, the index needs to bust through the top guardrail to break the trend. If the NASDAQ stays in trend, then the next wave lower could bring the 200-day moving average of 12,595 into play.
From a geopolitical view, it’s hard to believe the attack in Israel and its response will be over in a short timeframe. The biggest risk is that it pulls in other players and spreads into a much bigger conflict. Considering the region and potential nations in play, an oil price shock is a real possibility.
It sure looks like the 70s show could play again.
Overall: Global turmoil and the technical state of the NASDAQ tilts towards more weakness versus gathering strength. Investors might consider building cash positions as the NASDAQ approaches the upper boundary of its current channel and reallocating the cash into market leaders near the bottom guardrail.
SECTOR VIEW:
For the second week in a row, Invesco QQQ Trust (QQQ) outperformed SPDR S&P 500 ETF Trust (SPY), which usually favors more upside in the immediate term. It confirms our view up top that the NASDAQ could continue its way towards the top of its range.
Biotechs held the top two spots on our sector/industry performance leaderboard with SPDR S&P Biotech ETF (XBI) and ALPS Medical Breakthroughs ETF (SBIO). A mix of tech, banking and insurance made up most of the remaining positions in the top 10.
Energy and oil were at the bottom of the list as some of the week’s worst performers. A continuation and escalation in the Middle East would likely push oil & gas exchange-traded funds (ETFs) to the top of the list. The longer the conflict, the higher the price of oil and commodities are likely to go.
Something like SPDR S&P Oil & Gas Exploration & Production ETF (XOP) or Energy Select Sector SPDR Fund (XLE) could help offset any damage to stocks if the Middle East breaks out into all out war. We hope it doesn’t come to pass, but emotions and tempers are high at the moment.
STOCK VIEW:
Oil stocks are worth consideration, but we’ll wait a week to see how things in the Middle East play out in the days ahead.
The NASDAQ is in a descending trading channel and just closed a gap down, which can act as resistance and attract sellers. We find the 50-day average and the top of the channel directly overhead, which will likely limit immediate upside.
Rich Meyers