The 0.8% drop on Friday, extending the tech-heavy index's weekly loss to nearly 2%. However, we don't see it as the start of a downtrend, but rather as a return within an uptrend.
The re-escalating pandemic and emergence continue to drive the market narrative, as well as the current sell-off. That is surprising in our opinion.
In the past, investors have applauded every time economic data disappointed, seeing it as a catalyst for the Fed's extra-accommodative fiscal policy, including ongoing stimulus. However, markets were sold on Friday after it emerged that inflation could become a disruptive force within a delicate recovery, even after Fed Chair Jerome Powell said economic growth so far does not warrant removal.
We're not sure if this is a fluke or a true paradigm shift. Only time will tell.
Whatever it is, both environments can favor technology stocks. On the one hand, the ongoing spread of the virus is preventing the global economy from reopening, which has already proven beneficial for tech companies, helping to enable lockdown protocols rather than direct human interaction. On the other hand, a sell-off in tech stocks would allay concerns about their rising valuations amid rising inflation and attract dip buyers.
That dynamic is visible on the technical map.
On Friday, the NASDAQ Composite completed an Evening Star, whose star is an imperfect Hanging Man (top shadow). That three-day bearish pattern suggests a pullback, but not necessarily a reversal.
Although the RSI made a negative difference to the rising price, the volume shows that the recent green days had much more participation than the red days.
That shows that the strength is with the recent ascending triangle. So a return move is needed after the breakout, which will test the support of the triangle. If found, the supposed pending demand will be the technical catalyst for another leg up. a rebound that knocks out the Evening Star.
Moderate traders would probably buy on the dip.
Aggressive traders could go short on Evening Star's weekly boost and then buy the dip. Money management is crucial. Here's an example:
Trade example – Aggressive short
Input: 14,725
Stop Loss: 14.825
Risk: 100 points
Target: 14.225
Reward: 500 points
Risk: Reward Ratio: 1:5
