Stocks have fallen and they are trying to get up. However, the NASDAQ has a couple of technical hurdles overhead, which could make it hard for bulls to get a lot of traction in the near term.
Wall Street tried to push the indexes into the plus column to start the week only to succumb to selling. In our last newsletter, we thought the trade shape could change from buying the dip to selling into strength. That’s what we experienced on Friday and Monday, investors taking the opportunity to put some dollars on the sidelines following last week’s rebound.
Like always, prices leave markers, points where bulls or bears could find encouragement. Buyers have a tougher task with the immediate state of the NASDAQ. Last week’s bounce failed to break a clear descending trend line. If buyers can violate through topside, trend resistance, then they’ll bump up against the 50-day moving average. Both markers will likely serve as resistance and attract sellers.
Bears are looking at NASDAQ 14,200. If sellers can take the tech heavy index below 14,200, then it could be an express trip straight to the 200-day moving average of 14,000ish. Market psychologically speaking, it’s bullish when the current price is above the 200-day number and bearish when it’s below. That’s for indexes, stocks, ETFs, you name it.
For now, the weight favors bears as the current trend is down. It’s our opinion that investors would be wise to maintain a cautious approach and perhaps use strength to unload laggards. Building a cash position could allow investors to acquire leaders at better prices should bears win out.
Energy and Banks continue to lead the way. Energy is an inflation play as commodities tend to perform well during inflationary times, especially oil and gas. However, metals, miners, real estate, and other hard assets do well too. Banks are in favor due to the prospect of higher interest rates. Banks and other financial institutions make more money as rates rise because they can still borrow at low cost but charge higher interest rate to their customers, which increases profit margin.
Nonetheless, we’d prefer to remain on the sidelines for now. A full-blown correction is a possibility, although small at the time. However, that changes if the indexes fall below their 200-day averages, then the odds of a major move lower move to at least 50/50. A sweeping move lower would likely take Banks and Energy lower too.
Once again, we’ll monitor the situation from the sidelines and look to pick up interesting names once the choppy waters settle.