Return of the Naz
After posting a record high of 14,175 in the Nasdaq Composite on February 16th, tech stocks have taken an absolute beating. On Friday, March 5th, the Nasdaq experienced one of the craziest intraday swings I can recall, gapping up 1% at the open only to be down about 1% all to finish up over 1.5%. Wild.
In this tech correction, we’ve seen many names get slashed in price from their recent highs, making you do a double take at both how far they’ve come back yet also how far they ran. Few will argue against the idea that a healthy shakeout in tech names with lofty valuations was warranted given their massive run-ups. Some attribute this quick sell-off to the rapid rise in the 10-year bond yield. I’m no expert on bonds, but rates are still historically low, yet the speed at which we went from 1% to 1.6% is un-ordinary.
Be that as it may, my goal with this piece is to lay out my thinking as to why I’m positioning for a continued rebound in the Nasdaq and technology names over the coming weeks, and believe that March 5th marked the bottom of this correction. I will mostly be taking a technical, chart-focused approach to this. I’m no CMT, but I’ve been around charting since 2016 and stare at stock charts more than I care to admit. First, I’ll start with the 10-year.
Bearish Divergence in the RSI of 10-YR Treasury Index ($TNX)
Daily chart of the 10-YR Treasury Index
For those unfamiliar, $TNX tracks the movement of the 10-year bond yield, where Friday’s closing price of 16.35 is equivalent to 1.635% yield. You can see the top arrow points to a new recent high for the 10-year yield on Friday. However, the bottom part of the chart shows the RSI has been declining over the last few weeks. This is known as a bearish divergence, and leads me to believe the yield will begin to drop or level off.
Per Investopedia, “A bearish divergence occurs when the RSI creates an overbought reading followed by a lower high that matches corresponding higher highs on the price.” This fits the current yield situation perfectly. As the 10-year yield has made higher highs, the RSI reached overbought but has been making lower highs. These indications are never a sure thing (nothing is), but it’s important to note.
Nasdaq Breakout (and Retest) of Downtrend
Daily chart of the Nasdaq Composite
In the Nasdaq’s correction, we set a clear downtrend line falling from the 14,175 high level and ended up holding a key support level around 12,600 which was original resistance when it was a new high and then became support. On Thursday, we broke through the falling downtrend line on a strong day for technology. However, on Friday, with the 10-year setting the new high we just discussed, the Nasdaq retreated, though closing well off its lows. In fact, the low of the day perfectly taps (and tests) the downtrend line which had previously been resistance. To me, this is a strong signal that the Nasdaq can begin to work to reclaim its all-time high and beyond.
Another point to make on this chart is that we never hit oversold conditions despite the decline. From a technical standpoint, this makes me quite bullish. Revisiting our friends at Investopedia, they note that “if the downtrend is unable to reach 30 or below and then rallies above 70, that downtrend has weakened and could be reversing to the upside.” While we haven't gotten to the 70s in RSI yet, we very clearly never got to 30 and my bet is we will continue to see RSI rise for the Nasdaq.
Closing Thoughts
I got inspiration to put my analysis into formal writing (and not just Twitter DMs) in part from Michael Batnick’s blog post on March 5th - “It’s Not Different This Time.” On what may have turned out to be the bottom of this whole ordeal, when some names like Peloton and Zoom were in complete free-fall, Michael was a voice of reason. By just going back in history and highlighting times when it seemed like this was THE BIG ONE, they more often than not turned out to be another run of the mill pullback or correction.
That’s not to say it isn’t scary in the moment, especially when you have so many new investors who were first-hand witnesses to the COVID Crash. There’s never an all-clear signal, so you have to take the signs that you’re given. My hope is that by reading informed historical analysis like Michael’s alongside employing technical analysis as highlighted above, you can gather your wits and see the bigger picture.
As is the norm here at Fast Break Finance, I’ll leave you with a JAM - Return of the Mack. This one will never get old!
P & L ✌🏼
- Brian
