The Next Five Days
Technology and growth stocks suffered a sharp setback last week, recording their worst declines since October 2020. The rebound on Monday, 3/1/21, quickly faded as another sell-off occurred today. Some continue to blame the recent sharp selling in high-growth names on rising interest rates and fears of inflationary pressures. Although the structural growth technology stocks will likely continue with their long-term uptrends, the recent strong rotation into cyclical sectors and value stocks continues to gain widespread attention.
Remember, since the beginning of the easy monetary and aggressive fiscal policies, many market pundits have warned that inflation will begin to show up in the economy. However, interest rates remain historically low.
Hyperinflation typically occurs when there is a dramatic rise in interest rates, and most importantly, it must be a sustainable longer-term rising interest rates trend. It may be too early to call an end to the structural downtrend in US interest rates.
Nonetheless, the technical picture suggests the 10-year US Treasury yields (TNX) is currently challenging critical resistance along the 1.45-1.55% area. If TNX manages to clear convincingly above resistance, this implies inherent strength in yields (higher rates) and underlining weakness in the bond market (lower prices).
The technology sector and growth stocks may then succumb to a broader and more extensive correction. Enclosed below is a technical view of the Nasdaq Composite Index (COMPQ) and the Nasdaq 100 Index (NDX). The two indexes are proxies for the Technology sector, growth stocks, and the FAANG + MSFT.
Nasdaq Composite Index (COMPQ – 13,358.79)
The next few days will help to decide the outcome of the next directional trend in COMPQ. Since COMPQ is also a proxy for the Technology sector and growth stocks, this can help settle the growth and value debate. Why the next five trading days? A 2-month head/shoulders top pattern, two gaps down (2/17 and 2/21/21), and a negative outside day (3/2/21) warn of a near-term COMPQ top and a possible deeper correction. COMPQ must violate the neckline at 12,950-13,024.5 to confirm the distribution top. Below 12,950 suggests a deeper correction to 11,725-11,800, or closer to the 200-day ma (11,562). Will this finally alleviate the overbought condition?
The ability to maintain above the neckline support is also important as this can lead to another COMPQ rally to initial resistance at 13,607-13,729 (left and right shoulders). Above 14,175.12 (the head and 2/16/21 all-time high) would negate the distribution top and signals the next COMPQ rally to 15,400. The next five trading days are crucial, at least based on the symmetry of the h/s top pattern. Since it took 15 trading days to establish the left shoulder, this would imply that it may take 15 trading days to establish the right shoulder. Next Tuesday, 3/9/21, is the critical 15th day.
Nasdaq 100 Index (NDX – 13,059.95)
NASDAQ 100 Index (NDX) may be the best proxy for the mega-cap Technology sector and the FAANG + MSFT. Like the broader-based COMPQ, a head/shoulders top has developed over the past two months. The left shoulder is 13,564 (1/25/21 high), the right shoulder is 13,312 (2/24/21 high), the head is 13,880 (2/16/21 high). The neckline support is 12,758-12,764, and the technical base is 1,122 points. Violation of 12,758-12,764 confirms the head/shoulders top and warns of a deeper correction toward 11,636 or near the 200-day ma.
On the other hand, maintaining above the neckline support can also lead to an NDX rebound to initial resistance at 13,312-13,536 (the left and right shoulders). Above this renders a test of the pivotal head and the all-time high at 13,879.77. A breakout here signals the next NDX rally to 15,002. The next 5-days may help decide the next directional trend of NDX and possibly for many of the mega-cap technology names and FAANG + MSFT.