Stock markets are still in the midst of unprecedented rallies with little to nothing in the way of resistance seen at these record highs. This complicates things for traders – especially those that rely most heavily on technical analysis strategies. But the balance of the evidence suggests that investors should be looking to take a more protective stance over the next one to two months.
Corporate earnings
The NASDAQ is trading at record levels, and this can be expressed through the PowerShares NASDAQ Trust (QQQ, Financial). Since the U.S. elections, we have seen little in the way of downside retracements, and the QQQ ETF is now trading firmly above the psychological level at 130. As long as this is the case, traders are likely to view the asset as bullish on a purely momentum perspective, but the optimism is likely to subside at some stage.
When this happens, investors will need to construct a trading outlook that is conducive to achieving stability even in cases where volatility levels are rising. Ultimately, this means looking for ways to diversify into a broader number of sectors so that you are not caught long at the wrong levels in an asset class that is unfavorable in a more volatile stock environment. These are the types of factors that are taken into consideration in this detailed review of TD Ameritrade and these are the types of factors that will need to be assessed in the current market environment any time you are looking to tame a more proactive stance in the sector.
The first confirmation of whether this is going to be the case over the next few weeks will be seen with the next round of corporate earnings results. The tech companies in the NASDAQ 100 will be especially vulnerable to downside price moves if we start to see consistent disappointments in the blue chip names. Even a round of positive surprises in corporate earnings will probably not result in major rallies because most of these expectations have already been priced into the markets.
Chart view: PowerShares NASDAQ Trust
From a pure price perspective, there are many indicators that suggest valuations in the PowerShares NASDAQ Trust ETF are overextended at current levels. These types of readings are generally based on divergences from the mean so there is some level of skepticism that should be accepted when viewing the current market context.
Support is currently seen near the 120 level as this was an area of prior resistance that should contain prices on any initial attempts lower. Momentum should build if this level does wind up breaking, but this is unlikely to occur initially unless there is a major fundamental event that spooks investors into selling at the highs.
Disclosure: The author has no position in any stock mentioned.
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