Four major tech stocks accomplished a major feat on Friday of lifting the Nasdaq and S&P to a new high. Amazon, Google, Microsoft and Intel succeeded in lifting the Nasdaq from a bearish bias and a week of declines, back into a bullish bias and a new record high. There was a tremendous amount of short covering involved in this process. Amazon gained $128 after surprising with strong earnings in a quarter where they normally fail to impress. In the October 2016 earnings cycle shares fell from $831 to $710 when earnings disappointed. In October 2015 shares fell from $543 to $490 after their report. In 2014, they fell from $317 to $284. The pattern of post earnings declines was so visible that many traders were heavily short the stock going into the report. They paid the price with a monster short squeeze that likely damaged many accounts.

Similar events occurred in Google, Microsoft and Intel and that caused a monster short squeeze in the QQQs and that lifted the entire Nasdaq. Unfortunately, this was likely to be a short-term event. These types of gap openings almost always get filled. That means the price eventually declines back to where the stock closed before the gap higher. It may not be this week but we will likely see a return in the coming weeks.

The Nasdaq rallied exactly to uptrend resistance at 6,700 and that is where it stalled. Support is well back at 6,560 and Thursday's close. Apple and Facebook are the two biggest companies to report earnings next week and that means we could expect to see some additional gains but they are likely to be muted. The next week is when we could see the post earnings depression phase begin.

Despite the big Friday gain the Nasdaq only added 72 points for the week. The index had a negative bias at Thursday's close.

The S&P also spiked to a new record high thanks to monster gains in those large cap tech stocks. Next week will be a tradeoff between potential declines in industrial stocks and some left over short covering in tech stocks. Many traders got margin call notices over the weekend and they will have to liquidate positions on Monday even if they believe their shorts will eventually be profitable. That means they will have to buy those stocks at these inflated levels.

The S&P has support at the 2,555 level and I do expect to see that level tested again. Overhear resistance is probably the round number of 2,600 since that is over the majority of analyst forecasts for year-end at 2,534. There are still plenty of analysts with targets at 2,600 and higher. If tax reform details are positive, we could test those higher levels but it is also possible we could have a sell the news event on the announcement.

The top four stocks on the Dow added 118 Dow points but the index almost closed negative. The 24 Dow components that have already reported earnings are moving into their post earnings depression phase and that is going to be a weight on the index. Apple and Dow DuPont are the only Dow components reporting this week and Apple is after the bell on Thursday so there is not going to be any earnings support the first four days of the week. DowDuPont is not expected to be a market mover.

The Dow has resistance at 23,470 and it was solid last week. If the broader market begins to fade, I would expect the Dow to lead the decline. The Dow has gained over 1,685 points since the September 8th lows. During that time, there was only one pause in late September where the index went sideways for a week. There has not been any real profit taking and the index is due. It is very over extended and I doubt many investors would be buying the chart at this level.

The Russell 2000 also rebounded from a bearish bias at Thursday's close to bounce back into the congestion pattern. Resistance at 1,512 is strong and a weak Nasdaq will weigh on the Russell and vice versa.

Wednesday and Thursday are the big earnings days but other than Facebook and Apple there are no market movers. Alibaba could be a surprise but it is not likely to cause a jump in bullish sentiment. Tesla is more than likely going to disappoint.

The economic calendar is very busy with jobs reports, Fed meeting, tax plan released and the nomination of a new Fed chairman. The tax plan and chairman announcement are likely to be the biggest market movers.

Normally this is where I say I expect the market to continue higher in the long-term and readers should buy the dips until proven wrong. That recommendation has not changed only I would not buy the initial dip. We could actually get a multi-day decline in the near future and we should wait until a rebound appears rather than trying to catch a falling knife. All of the fundamentals are positive but the market is simply overbought. We need to look for those pressures to be equalized before putting money back to work.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email