Another eventful day on Wall Street yesterday with large sell offs exceeding 2% on all the US major indices. Today is setting up to be just as eventful. The Nasdaq is the topic for today’s Market Moment, and the Tech Index is at risk of beginning a new down trend.
Rising 10 year yields continue to spook the markets. 1.50% seems to be the line in the sand. If the yield remains stable or drops, the stock markets will like that…even though traditionally this would mean money is going into bonds (bonds being bought) and money would be leaving the stock market to do this. But the market wants to be reassured that interest rates will not be rising. There is too much debt in the system, that servicing it now becomes a major issue.
On Equity Guru’s Market Moment, I have discussed the dangers of a reversal pattern triggering on Stock Markets for the past week. The Nasdaq being the more likely to do so on a technical standpoint. Our favorite reversal pattern has triggered. But before the Nasdaq chart, we must discuss this man once again:
Zerohedge piqued a lot of interest yesterday when they explained that Jerome Powell would essentially have to announce some sort of yield curve control today. He is speaking at 9am PST/12pm EST in an event, and all eyes (well mostly ears) will be on the Fed chair. The market wants to hear some sort of hint towards bond market manipulation. Some comment regarding yield curve control or a new Operation Twist would please the market. Amazing if you think about it. The market wants to have bond market manipulation in order to be happy.
I recommend reading the set up. It delves into the repo market and bank balance sheets. But the gist of it is that a massive short squeeze on the 10 year bond could occur, which would cause yields to drop which would be good for Stock Markets and Gold. Zerohedge is expecting a big green day on the Stock Markets.
Do you see what I see? We do have one of our favorite reversal pattern. The Head and Shoulders Pattern. No not the shampoo. But this:
It is also worth noting that the Nasdaq has broken below a trendline which has held since March 2020. Notice how we got three touches and bounces from this trendline. Three is the magic number to validate a useful trendline. The break occurred last week, and we retested it before dropping further.
Readers know my take. I do keep trendlines in mind, since they do show the slope and can indicate when a trend is over. In this case, it would mean the uptrend on the Nasdaq is over.
I just prefer horizontal support (price floor) levels. This is where reversal patterns such as the head and shoulders and the double top/bottom come to play. Our readers and I have used these same patterns to bag great returns on all type of markets. This could be our next opportunity.
The head and shoulders pattern was triggered on the close below 12,800 yesterday. Not looking great. What about the retest?
Today’s candle did show some rejection as sellers stepped in on the retest to the 12,800 zone.
If we continue to close below 12,800 on the daily chart, the Nasdaq will see a move lower. In fact, a new bear trend is in the cards.
If we manage to close back ABOVE 12,800, we then have a fakeout breakout. And we likely make more record highs going forward. Really because of the Federal Reserve promising to do anything to keep markets propped. This could occur today when Powell speaks. Listen for his comments on the yield, and what the Fed will do about it. That is what the markets want to hear.
Another thing we can do is to watch the price action on Apple (AAPL) and Tesla (TSLA). Both stocks have a huge impact on the Nasdaq. Both are testing recent lows.
The chart of Tesla was covered on the 23rd of February. Read my technical tactics, and so far it is playing out just the way I was predicting. If Tesla does not hold and dumps down to $500, the Nasdaq will be under pressure….not to forget the S&P now as well!
Apple looked like it faked us out with a close back above $126, but alas, the sellers smashed it down once more. We are now at the recent lows at the $120.50 zone. A break below this and the Nasdaq will fell the pain.
Keep both of these stocks on your radar. Any significant bounce, and the Nasdaq has a higher probability of recovering.
Rotation out of Tech?
Many analysts have said that there will be a rotation out of tech at some point. Many investors know that valuations are crazy. Tech stocks have moved up too fast in a short period of time. They need to cool off.
One important observation we have seen is that the Dow Jones has remained the strongest out of the US Indices.
This has been largely to the moves in Boeing (BA), American Express (AXP), JP Morgan (JPM) and Chevron (CVX).
One must ask if we are seeing the rotation out of tech/growth and into value stocks. The companies on the Dow are likely to be here 10 years down the road, and pay dividends. People forget that about Warren Buffett’s value investing. Even if the stock drops and fluctuates, he still makes hundreds of millions of dollars on dividend payments.
In a weird way, value stocks can be seen as the new bonds, but with better yield. When Bonds had a decent yield, you would hold them for safety and for their yield. Now a days, Bonds are being held and traded for capital appreciation betting the Fed will keep rates suppressed, or will even cut rates down into the negative!
Yes, if we get a broad stock market sell off, everything dumps including value stocks. But those dividends start to look a lot more attractive, and the fact the company will still be around a decade from now.
Keep a close eye on the Nasdaq price action and the Dow Jones. It would indicate if we are seeing this rotation out of tech and into value. Some analysts even say this is occurring due to the Democratic administration. Analysts believe the Democrats will put regulations on big tech. Corporate donations to the Democratic Party seem to say otherwise, but we shall see.
I will leave you off with a final thought. If the Nasdaq begins a new down trend, pray for Cathie Wood and Ark.