Confused? The DOW jumps 306 points while the NASDAQ slumps 311 and the S&P 500 spends most of the day in the green before going underwater at the closing bell. Which do you follow? Is it as easy as the optimist seeing the DOW’s action as half-full and the pessimist half-empty on the NASDAQ’s fall?
Long time readers probably know where this is going. It’s been our experience that the NASDAQ is the Mary of the Markets; where it goes the other indexes are likely to follow. It’s not pessimism nor optimism that drives our opinions/analysis, it’s reality of price movements and what they most likely mean.
To be honest, what’s happening with the NASDAQ is not good. The index is walking down the stairs with lower closing lows and lower closing highs. The textbook definition of a downtrend. That doesn’t mean the tech heavy index won’t have some up days, relief rallies will come. However, they should be seen as an opportunity to sell short-term positions into strength until the NASDAQ clearly produces a pivot point.
We’ll be on the lookout for a rally, followed by more selling that stops short of the most recent low point, and then another spike higher that takes the index above the most recent high point. In other words, taking the first step up the stairs.
Past prices give us some clues as to where the pivot back might occur. The first technical safety net come into focus at 12,000ish. For some reason, traders like round numbers and we see price support at 12k on the daily, weekly, and monthly charts. The computer programs know it’s there too and could trigger some buying as the NASDAQ approaches.
If 12,000ish doesn’t hold, then we see the index dropping in 500-point increments, not in a single day’s trading, but cumulatively over a few days/weeks of trading. The worst-case scenario, at this point, is a 20% drop, which lines up almost too perfectly with the 50-week moving average of 11,200.
If the NASDAQ continues to walk down the stairs, the DOW and S&P will eventually follow. Investors looking to possibly take the bear side of the trade might consider ProShares Short Dow30 (DOG) or ProShares Short S&P500 (SH), both are designed to go up when the underlying indexes fall. Of course, that means they lose value when prices head north.
Oil, gas, metals, mining, food, and banks lead the charge on our leaderboard last week. What do they all have in common? The are sectors that benefit from inflation, which equals higher interest rates and higher commodity prices.
With the NASDAQ clearly in correction mode as we type, there is no way we’d add money to the market. Cash truly is king when prices fall.
Same here, a sinking ship pulls down all prices. We’ll wait for the pivot point to emerge before adding new names here.