It’s a scene anybody who has watched old Western movies is familiar with. A cowboy standing in the plains with his dog and horse to his side, looking at the storm clouds building on the horizon. He tells his companions, “It looks like it’s headed our way; we better get going” as the wind and darkness kick up on the screen to emphasize the severity of the pending weather.
It might not be as dramatic or cinematic, but a market technician sitting at their desk with his/her dog laying at their feet can see the storm clouds coming from the NASDAQ’s chart. It’s coming. You can see the index is on the verge of rolling over on a trio of fronts.
- Relative Strength Index (RSI) is bordering on overbought and has hovered there for the last week.
- The price pattern has the shape of a rounding top.
- MACD’s short-term line is elevated, rolling over, and headed for the longer average, setting up a bearish crossover.
We don’t believe a major storm is coming, more like a summer thundershower that cools things down following a hot, humid day. And certainly, stocks have been hot. Looking at the NASDAQ’s chart, there are three places where we believe the rollover could stop.
- 14,000 – the post gap low
- 13,800 – the pre-gap high
- 13,500 – support and where the 50-day moving average is headed
Based on our experience, the most logical of the three is the second option, filling in the gap, which is a common technical analysis occurrence. No matter which of the three Wall Street picks, investors might consider using any weakness as a buy the dip opportunity. It’s clear that the street expects the Federal Reserve to cut rates as the economy weakens in 2024. There is even talk of deflation (not going to happen with the government running a $2 trillion deficit and an election year). That may or may not happen, but it is the prevailing wisdom at the time. That means any weakness is likely to be sharp in nature and short in time.
If we’ve made the correct call, index investors might consider adding Invesco QQQ Trust (QQQ) if/when the NASDAQ approaches the technical levels outlined above.
For the second week in a row, SPDR S&P 500 ETF Trust (SPY) outperformed QQQ, which adds another reason to our weakness is likely coming opinion. Stocks tend to do better when the NASDAQ leads the way.
Healthcare was the way to go last week as the sector held three of the top five spots on our performance leaderboard. ARK Next Generation Internet ETF (ARKW) was number one. However, industry/sector investors might think about holding off and waiting for stocks to settle back a little before adding anything new.
We’ll buy the dip, if/when it happens.