Is The Party Over? History Says Yes

Name three things that don’t last long…

1. Dogs that chase cars
2. Kim Kardashian relationships
3. And Relative Strength Readings (RSI) above 70 for major, market indexes.

We don’t have a dog that chases cars or know Kim K, so let’s talk about the NASDAQ.

The index has been on the climb since breaking resistance at 12,250 once Wall Street had confidence that President Biden and House Speaker Keving McCarthey would reach agreement on the debt ceiling. One thousand points later, the NASDAQ’s RSI is 72.56.

Rewinding the NASDAQ chart, the buying party could be ending. As you’ll see from the chart below, the last three times the index topped 70, a selloff followed. Two of the three downdrafts were extensive. It harkens back to an axion we wrote about last week, “Buy the hype, sell the news.”

If trades take the overbought reading and hit the take profits button, there are two key levels of support that will tell how deep the cut could go. The first technical safety net is at 12,750 but the real test would be if the NASDAQ slipped back to 12,250, which is currently in the same neighborhood as the 50-day moving average.

As long as the tech heavy index stays north of 12,250, which is where the NASDAQ stalled for most of 2023, the longer-term prospects should continue to favor upside.

In what could be another sign the markets could be destined for some weakness, SPDR S&P 500 ETF Trust (SPY) outperformed Invesco QQQ Trust (QQQ) last week. It’s been our experience that bulls tend to have the edge when the NASDAQ leads the way.
Technology, small/regional banks, commodities like oil/gas and metals/mining made up the top 10 performing sectors/industries on our performance leaderboard.

If markets show weakness, it is possible to see rotation in other sectors. SPDR S&P Metals and Mining ETF (XME) could be attractive on a dip with a stop loss if the exchange traded fund (ETF) closes below $44.

As much as we like putting ideas here, we always trade in alignment with our opinion, and our opinion is that the NASDAQ is poised to take some off the top. Why buy something today that might be a little cheaper the next time we get together.

Rich Meyers