Graph of the Day: Will "Cognitive Dissonance" Prick NASDAQ?

It is up 15.9% so far this year. A week ago, profits have so far been 20.8%. Compare that to a decrease of 0.4% for the year, or a loss of 7.6% in the same period. Or the drop of 11.9% since the beginning of the year.

Also, when analyzing the S&P 500 index sectors, the technology pops off the page, gaining 15.2%, following NASDAQ. It is one of only four sectors in the green for 2020, barely a third of the total, and is double the profits of the number two consumer goods sector, which has risen by 7.7%.

On the one hand, technology inventories are flourishing, based on the expectation that millions of people will continue to work from home, order goods and groceries online, while the COVID-19 pandemic continues at the expense of the economy. On the other hand, however, discretionary stocks – which tend to underperform in times of economic hardship as consumers tighten their belts – outperform.

You can't have it both ways. Do investors see an increase in activity because of the famous V-shaped recovery and the economic boom, or do they expect people to stay at home and be unable to cause that boom? We call this cognitive dissonance. And we see this conflict between stocks trading near their pre-pandemic peaks, while safe-haven assets like and government bond prices also hit record highs.

The question we ask ourselves is whether the technology industry can maintain this rampant outperformance. Let's see what story the chart tells.

The index started trading within an upward channel after troughing in March. However, it fell out of the channel on Friday. It climbed back on Monday, but encountered resistance at the bottom of the channel. Perhaps the increase was due to a short push. Either way, there was more money to settle positions than create them. That resistance was confirmed with Tuesday's sale. And here we are.

Yesterday was the third consecutive day when bulls failed to re-enter the rising channel. Meanwhile, the RSI shows that momentum has been reached, as it often is before the price does the same. The MACD also suggests falling prices. If the price drops another 2%, it will have completed a month-long summit. Large buds usually last a minimum of 3 months, but these times are anything but & # 39; usual & # 39 ;.

Trading Strategies

Conservative traders will wait for a penetration of at least 3% below 9,900 and at least a 3-day filter, preferably for a weekend; then patiently wait for the likely return move to retest the 10,221 neckline before risking a short position.

Moderate traders would follow the same outbreak pattern as conservative traders, but will likely be patient enough for just a 2% drop to 10,017, a 2-day penetration and a corrective rally for a better entry point, if not for a pattern repeat.

Aggressive traders are likely to be satisfied with a 1% neckline penetration, below 10,200, knowing they are at risk of being whipped and prepared financially and mentally to absorb this risk. Alternatively, they can hold short rallies triggered by the Fed or another driver.

Trading example – very aggressive short position

Entry: 10,400
Stop-Loss: 10,600
Risk: 200 points
Target: 9,800
Reward: 600 points
Risk-reward ratio: 1: 3

Note : This trade sample is very aggressive and therefore not for everyone. We don't know if it would work out, but just play & # 39; the odds & # 39 ;. We don't even try to win every trade, but strive to get on the statistics side and generally get positive results. In addition, this exercise is for educational purposes only, demonstrating how to prepare a reasonable trading plan.

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