It’s straightforward this week, short, sweet and to the point.
We got what we wanted, the NASDAQ taking charge and leading the markets higher. The tech-heavy index was up to start the week while the S&P 500 and Dow spent the day underwater. As a result, our momentum and leadership models are bullish.
That’s the good news.
Here is the bad news. The NASDAQ is likely to join the DOW and S&P 500 in some profit taking. The NASDAQ moved into overbought territory with a Relative Strength reading above 70. As a rule of thumb, a score above 70 attracts selling. Readings that high can last for a little while, but they don’t last long.
The last time the NASDAQ topped 70 survived about a week at the end of August and start of September before profit taking. Selling lasted a couple of weeks and the index slid to a previous support/resistance level. While the pattern might not be exact this time around, they never are, but at least rhymes, then the NASDAQ could dip modestly. The first level of support is at 12,000ish, maybe as low as 11,800ish.
All our market models suggest any selling would be of the “buy the dip” variety and not the beginning of a longer-term downtrend.
Investors with short-term positions could think about using any continued upside as a chance to sell into strength. Those who might like to protect profits or possibly make a few dollars if the elevated Relative Strength score turns into downside, might utilize an inverse, index exchange traded fund (ETF) like ProShares Short QQQ (PSQ).
PSQ’s objective is to deliver the opposite return of the NASDAQ 100 index on a daily basis, meaning if the NASDAQ 100 drops 1% then PSQ would rise 1%. Of course, the opposite is true if the NASDAQ rises.
Oil and Gas stocks dominated the top our performance leaderboard for the second week in a row. Much like the NASDAQ, Oil and Gas ETFs are overpriced too and ripe for some downside. In fact, looking through the top 10 performers from last week, and they all look extended. We’ll pass this week and look for opportunities to buy a dip, provided we get one.
Based on our expectations of some profit taking in the near-term, we will stay on the sidelines hoping we’ve made the correct call. If so, then we’ll have a chance to pick up some companies we like at a better price. Why pay more if you don’t have to, right?