Figure 1- Nasdaq Composite Index $COMP
I am staying with the theme of using the RSI to judge how to call the Nasdaq. While an overbought RSI does not automatically mean a trend reversal, with the Nasdaq, I always keep a close eye on this .
I initially changed my short-term call on the Nasdaq from a SELL to a HOLD on January 5. I liked the Nasdaq’s declines to start 2021, especially after overheating. The RSI was no longer overbought as well.
After changing the call back to a SELL on January 11th, the Nasdaq declined 1.45%.
Over the last several weeks, this has been a consistent pattern for the Nasdaq. The Nasdaq pulled back on December 9th after it exceeded an RSI of 70, and briefly pulled back again after passing 70 again three weeks ago. We exceeded a 70 RSI again before the new year, and what happened on the first trading day of 2021? A decline of 1.47%.
Tech can rally at any time and witness a plunge at any time. Truly, this sector could move sideways before seeing a correction sooner rather than later.
Although there are also tailwinds for tech, they are specific to subsectors. Do what you can to find tech sub-sectors that are innovating, disrupting, and changing our world.
I am especially bullish on cloud computing, e-commerce, and fintech.
The Nasdaq is no longer overbought, and its RSI is now hovering around 64. I like this level more as a HOLD, but I still feel that it has overheated in the short-term.
I am generally optimistic and bullish for 2021, but I would like a pullback closer to the 50-day moving average before considering buying back in.
I also have some concerns with the Democrats winning Senate control, and its potential consequences for tech. It may not happen in 2021, but a Democrat-controlled Congress could raise taxes and further regulate high growth companies.
Additionally, love him or hate him, the censorship of President Trump across social media platforms raises questions about what constitutes free speech, and if Big Tech has too much power.
Because the RSI is back in HOLD territory, I’m switching my call again from SELL back to HOLD.
If the RSI ticks back up above 70, I’m switching back to SELL. The Nasdaq is trading in a clear pattern.
Do not let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself, especially in markets. I have many concerns about tech valuations and their astoundingly inflated levels. The recent IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this.
For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is a good option.
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Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care
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