On Friday, we all got reminded that “risk” happens fast.
Stocks blasted to new all-time highs in the morning. But all of the major indexes suffered a massive reversal by midday. The hardest-hit positions were the beloved FANG stocks – Facebook (FB), Apple (AAPL), Netflix (NFLX), and Google/Alphabet (GOOG) – and all the rest of the big “momentum” trades that folks have been buying and bidding higher over the past few weeks.
Most of the gains over the past month were wiped out in one day. That’s what happens when the momentum trade fades.
We saw the same action during one day in mid-May. That was a one-day correction of about 2%. Stocks immediately recovered, and then rallied to higher highs.
I’m not so sure the bulls will be that lucky this time around.
As I told my Delta Report subscribers on Friday morning, the typical action prior to a Federal Open Market Committee (FOMC) meeting – taking place this Tuesday and Wednesday – is for the market to be lower on Friday and Monday, then for stocks to rally on Tuesday and Wednesday morning
So, I didn’t think the opening gains on Friday would hold. And while the S&P 500 only closed down two points, it closed 15 points below the high of the morning.
The NASDAQ closed a whopping 133 points lower than its early-morning high. That’s a BIG drop – more than 2% from the high. That’s the biggest decline we’ve seen in the NASDAQ since the “Trump rally” began. And it’s significant.
With that in mind, here’s what to look for in the action today…
I could go into a long-winded and very technical discussion of pattern evaluations. But most of you likely don’t have much interest in that. So, I’ll just cut to the chase…
The NASDAQ has probably seen its high for the year. But the S&P 500 and Dow Jones Industrial Average still have the potential to make slightly higher new highs.
So, it’s still probably a little too early to be looking to short S&P and Dow stocks. Most of them look like they can push higher one more time. And, if they do, then most will form negative divergence on a number of technical indicators. Any rally from here is on borrowed time.
The NASDAQ, though, already violated its previously bullish pattern. Friday’s decline shifted the intermediate-term trend from bullish to bearish.
On a short-term basis, most NASDAQ stocks are slightly oversold. If the typical pre-FOMC pattern plays out today, they’ll be slightly more oversold and set up for a bounce tomorrow and Wednesday morning.
I’ll be looking to sell the top NASDAQ stocks short into that bounce.
This analysis is based on the relationship between the index and its 9-day exponential moving average (EMA). The S&P 500 closed Friday above its 9-day EMA. So it’s still in a bullish configuration.
The NASDAQ, however, closed below its 9-day EMA. That shifts the short-term momentum to bearish. So there’s more downside ahead.
While I think the S&P 500 has the potential to make a higher high over the next few days, I expect the NASDAQ will make a lower high. And I’ll be looking to short some of the most popular momentum stocks into that event.
I’ll update Delta Report readers on these trends throughout the day on Jeff Clark Direct.
Best regards and good trading,
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