Trading Places with Tom Bowley

NASDAQ, Internet, Software All Facing Critical Tests

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June has been fairly kind to the NASDAQ 100 index ($NDX), technology (XLK), software ($DJUSSW), and internet ($DJUSNS) and these have all been leaders, but the combination of overbought, negative divergences and a weak seasonal period has sent all four down to areas not seen recently. Let's start with the NASDAQ 100:

The negative divergence suggests at least the possibility of key PPO centerline and 50 day SMA tests (pink arrows). While we've seen tremendous resiliency in NASDAQ shares, a test of the 9500 area would help to relieve the momentum oscillators just as we approach earnings season, which probably wouldn't be a bad thing at all.

The problem with the NASDAQ currently is that two leading industry groups that comprise a good portion of the NASDAQ have been signaling a flashing caution light for sometime now. Internet stocks ($DJUSNS) are breaking below their 20 day EMA with a negative divergence in play, so the 50 day SMA would seem to be a minimal target, barring a recovery later today to close above the 20 day EMA:

The two horizontal lines represent the top and bottom of gap support from mid-May. The 50 day SMA has now moved up into the middle of that gap support zone. Therefore, short-term I'd look for support in the 2050-2075 neighborhood. Software ($DJUSSW), one of the best industry groups of the last few years, also is adding to the selling pressure in equities:

I'm a HUGE fan of software stocks. In the current market environment, this group can grow earnings rapidly and in a historically-low interest rate environment, the group deserves nose-bleed-type PEs. But it would not be unusual to see a big market scare just before earnings begin to come out in a few weeks. Could we see another 5% drop to test that rising 50 day SMA? Absolutely. Would I bank on it? No. I've said for the past three months that this selloff was much, much different than 2008. Yes, there are certain industries like airlines ($DJUSAR) and hotels ($DJUSLG) that are experiencing difficulties similar to what the banks went through during the financial crisis, but there has also been a TON of accumulation of areas that continue to perform well - even during the pandemic. I don't know when the short-term selling will end. Maybe it's later today. Maybe it's next week. But I do firmly believe this selling will once again be met with accumulation, at least with respect to the stronger pandemic industries.

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Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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