What a bad way to start the week. Monday’s selloff puts what could have been upside confirmation into question. What we have now for the NASDAQ is upside resistance at 15,800ish and downside support at the 50-day moving average of 15,380.
If the NASDAQ closes below the benchmark 50-day number, then the index is likely to retest last week’s closing low of 15,085. If the NASDAQ finishes under 15,000, it would likely be bad for prices with the possibility of heading to the 200-day moving average of 14,475.
On the upside, a last print above 15,800 might be enough to ignite a holiday rally back to the NASDAQ’s 52-week closing high of 16,057.44.
These wild swings and false buy/sell signals generate confusion for investors of all experience levels. Through 30+ years of observations, we’ve come to understand that up big one day, down big the next is a sign of change.
It doesn’t necessarily mean stocks are going to switch from bullish to bearish. It could mean a change in leadership. As money comes out of old leaders, the markets go down. When the money rotates into the next thing, then prices go up. That’s sort of what we’ve seen of late as high growth sectors have underperformed more defensive industries.
Nonetheless, Monday’s red push lower moved our momentum model out of an emerging buy signal into an absolute neutral reading. Additionally, the three levels of momentum we measure are all pointing lower, suggesting more weakness could be in the immediate future. However, we don’t expect the weakness to be deep as the long-term measuring stick is near a three-month bottom and the mid-term number doesn’t have a lot of space below either.
If our Mo model interpretation is correct, continued weakness in the next few days might be an opportunity to buy, especially if 15,000 holds. For now, we believe the best thing investors can do is observe from the sideline. The NASDAQ is in a short-term downtrend with more downside risk than upside reward.
If we’ve made the correct call, investors will have an opportunity to buy lower and at a place where the NASDAQ has firmer footing.
Oil and Gas and Technology Exchange-Traded Funds made up the top 10 or our sectors/industry performance leaderboard for the past week. Something else stands out too. The NASDAQ 100 and S&P 500 were within the top 12 performers. Normally, index funds tend to be closer to the middle of the pack. When they inch towards the top, it’s another sign that Wall Street is seeking less volatile investments, which tends to happen in times of uncertainty, like now. It also adds weight to our market analysis that the times could be a changing,
We just can’t add new money to an individual stock when we feel downside potential outweighs upside opportunity. Add in momentum pointing to more weakness in the immediate term and we’ll just have to wait.
The NASDAQ had a chance to break out of the box but slid instead. It’s dangerously close to falling through the bottom, which would bring last week’s lows into play.