The NASDAQ Composite fell 0.8% on Friday, extending the tech-heavy index's weekly loss to almost 2%. We don't see it as the start of a downturn however, rather, as a return move within an uptrend.
The re-escalating pandemic and rising inflation keep driving the market narrative—as well as current selloffs. That's surprising, in our view.
In the past, investors cheered each time economic data disappointed, seeing it as a catalyst for additional dovish fiscal policy from the Fed which would include ongoing stimulus. On Friday, however, markets were sold off after consumer sentiment data showed inflation might become a disruptive force within a delicate recovery, even moreso after Fed Chair Jerome Powell said the economic growth thus far does not warrant removing accommodation.
We're not sure if this is just a fluke or an actual paradigm shift. Only time will tell.
Whatever it may be, either environment could favor technology stocks. On the one hand, the ongoing virus spread is keeping the global economy from re-opening, which has already proven to be beneficial for technology firms, which helped enable lockdown protocols in lieu of direct human interaction. On the other hand, a selloff in tech shares would counter concerns over their escalating valuations amid rising inflation and attract dip buyers.
That dynamic is visible on the technical chart.
On Friday, the NASDAQ Composite completed an Evening Star, whose star is an imperfect Hanging Man (upper shadow). That three-day bearish pattern suggests a pullback though not necessarily a reversal.
Although the RSI provided a negative divergence to the rising price, the volume demonstrates that the recent green days had much more participation than the red days.
That demonstrates the force is with the recent ascending triangle. Thus, a return-move is due after the breakout, which will test the support of the triangle. If found holding, its presumed waiting demand will be the technical catalyst for another leg higher.
Trading Strategies
Conservative traders should wait for the triangle to prove itself, with a rebound that takes out the Evening Star.
Moderate traders would probably buy on the dip.
Aggressive traders could enter a short, riding the weekly Evening Star’s impetus, then buy the dip. Money management is crucial. Here’s an example:
Trade Sample – Aggressive Short
- Entry: 14,725
- Stop-Loss: 14,825
- Risk: 100 points
- Target: 14,225
- Reward: 500 points
- Risk:Reward Ratio: 1:5