Week In Review: Nasdaq Tracing Out Head And Shoulders Top

 

Nasdaq Tracing Out Head and Shoulders Top

 

The complexion of the market changed considerably in June as fatigue finally set in after a very strong rally.  June was littered with a spate of heavy volume down days, especially in tech stocks, which is not ideal for this aging bull market. The biggest negative divergence occurred in the Nasdaq and the Nasdaq 100, when they both traced out a large negative reversal on a monthly basis. They both closed below their respective 50 DMA lines on Friday which is not ideal. Additionally, they both snapped a very strong win streak and the Nasdaq tracing out a large head and shoulders top pattern.  In fact, over the past 12 months, the Nasdaq only had two down months (Oct 2016 and June 2017). 

Normally, a down month is not a big deal. However, when it is a big negative reversal on a monthly basis, occurs after a big move, happens on heavy volume, and a slew of leading stocks are smacked, then something else is at play.  The market went from being exceptionally strong to showing signs of near-term fatigue in June. 

As of Friday’s close, the so-called FAANG stocks are not acting well. Only Facebook closed above its 50 DMA line while AmazonAppleNetflix and Google (Alphabet) are all below their respective 50 DMA lines. Remember, the 50 DMA line is a normal area of support, so a close below that level is not ideal. 

The bulls argue that this is another normal and healthy pullback because even with all the technical damage occurring, the major averages are still only a few (<4%) percentage points below their record highs. From where I sit, if the bulls show up and send the market higher from here- then we will have another very nice buying opportunity and there are a ton of early entry points forming in leading stocks. Conversely, if the selling gets worse, and all the major indices close below their respective 50 DMA lines, then a much more defensive stance will be warranted.

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