Sellers have left the building… for now at least. Buyers took control of the markets to start the week with the NASDAQ sprinting to a 3.41% gain. We thought stocks were poised for a rebound as we pointed out in last week’s newsletter.
“Odds are the market continues higher after Monday’s reversal. Despite the sudden recovery, the NASDAQ is in oversold territory with a relative strength reading below 30. (Thumb rules, above 70 is overbought, below 30 is oversold.) If we’ve made the correct call here, then the NASDAQ could rebound to its 200-day moving average of 14,735.50 and falling.”
Stock yo-yoed a bit last week. We were off by a few days but still on the right side of the next direction. The second part of last week’s commentary, “If we’ve made the correct call here, then the NASDAQ could rebound to its 200-day moving average of 14,735.50 and falling,” is the index’s most likely destination.
Benchmark moving averages like the 200-day tend to act as resistance on the way up and support on the way down. In this case, resistance. It would not be surprising to see the NASDAQ find its way to the long-term trend line and attract selling. That’s when the market will likely tell us whether this is the beginning of a new uptrend or if the NASDAQ possibly goes into bear market mode (down 20% from its high).
It’s too early to say the selling is over and that a new rally has begun. One thing we do know, however, is that the NASDAQ has more upside resistance than downside support at the moment. That means stocks have more downside risk than upside reward, in our opinion.
We should have a good sense of what’s next following the next wave of selling. If the NASDAQ closes below last week’s bottom, then we could be headed for major selling. On the other hand, if the NASDAQ quickly rebounds, it’s likely that stocks will move into recovery mode.
The best course of action right now is to wait and see. Investors might also consider selling underperformers to reallocate money into market leaders once a reversal is in place.
Energy stocks once again took charge last week owning the top three positions on our sector/industry leaderboard. Technology bounced to number four. Technology Select Sector SPDR Fund (XLK) would likely hit its 50-day moving average of $167.27 if the NASDAQ trades to its 200-day average.
Short-term investors might consider a tech exchange-traded fund (ETF) like XLK, just be prepared to cut losses if XLK closes below $151.
It’s too dangerous for us to consider individual stocks in the current environment. First, you must get the market direction correct, then pick the right sector, and then the right stock. Going long an ETF is a safer way due to a portfolio of diversified holdings.