Stocks close mixed, with the Dow rising, S&P 500 edging lower and Nasdaq Comp dropping the most out of the benchmark indexes. The Nasdaq has essentially gone straight up since the end of August, but the index seems to have stalled at the top of its trading range in recent days. Is it just taking a breather before running higher or are tough times ahead? From my “Technically Speaking” column:
Technology stocks’ wild ride higher may have a short shelf life.
The technology-heavy Nasdaq Composite has surged 16% since the end of August, and the Nasdaq 100 Index is up 14%, outperforming both the Dow Jones Industrial Average’s 9% gain and the broader Standard & Poor’s 500-stock index’s 11% rise. But a topping pattern may be developing for the Nasdaq 100, prompting some market technicians to start hedging positions in anticipation of a correction.
Roger Volz, director of technical strategy at BGC Partners, said the Nasdaq 100 reached overbought levels when it crossed above 2020 last week, which caused him to take a more cautious view on the index. He said he focuses on the Nasdaq 100 because blue-chip tech stocks have led rallies and downturns throughout the year. The Nasdaq 100 is a value-weighted index that contains the 100 largest nonfinancial companies listed on the Nasdaq.
The Nasdaq 100 was recently down 0.7% at 2011. Much of the index’s move last month was fueled by large tech stocks, with dividend increases from Microsoft and Cisco Systems igniting the rally. But after the Nasdaq 100 surged through 2020 on Sept. 24, the index has stalled out in a choppy trading range between 1975 and 2024.
“Now, it’s a question of driving through resistance,” said Mr. Volz, who noted 2035 is an important level to watch. But if the index can’t break through that level, expect a “significant break to the downside,” Mr. Volz said.
“Once we get past payrolls and get into the meat of the earnings cycle, then it’s just going to be a function of getting a corrective signal that would confirm a downside break,” Mr. Volz said.
He noted the index tends to move quickly, meaning once the corrective phase begins, it won’t take long for a significant drop to occur. There also isn’t much support for the Nasdaq 100 until it hits its August highs around 1915, Mr. Volz added, which is 4.5% lower than current levels.
There are a few ways the index’s overbought conditions could be alleviated without enduring a big slide. Sideways trading for a substantial time frame could ease overbought levels.
But after the big September rally, any fundamental reason that would prompt a selloff could have a devastating effect.
“There could be a propensity for traders to sell more aggressively as we get close to the end of the year to avoid losing 2010 gains,” he said. “A correction should become more aggressive once it starts….We want to be hedging into the strength rather than wait for the weakness to develop.”