NASDAQ, Internet, Software All Facing Critical Tests

June has been fairly kind to the NASDAQ 100 index ($NDX), technology (XLK), software ($DJUSSW), and internet ($DJUSNS) and these have all been leaders, but the combination of overbought, negative divergences and a weak seasonal period has sent all four down to areas not seen recently. Let’s start with the NASDAQ 100:

The negative divergence suggests at least the possibility of key PPO centerline and 50 day SMA tests (pink arrows). While we’ve seen tremendous resiliency in NASDAQ shares, a test of the 9500 area would help to relieve the momentum oscillators just as we approach earnings season, which probably wouldn’t be a bad thing at all.

The problem with the NASDAQ currently is that two leading industry groups that comprise a good portion of the NASDAQ have been signaling a flashing caution light for sometime now. Internet stocks ($DJUSNS) are breaking below their 20 day EMA with a negative divergence in play, so the 50 day SMA would seem to be a minimal target, barring a recovery later today to close above the 20 day EMA:

The two horizontal lines represent the top and bottom of gap support from mid-May. The 50 day SMA has now moved up into the middle of that gap support zone. Therefore, short-term I’d look for support in the 2050-2075 neighborhood. Software ($DJUSSW), one of the best industry groups of the last few years, also is adding to the selling pressure in equities:

I’m a HUGE fan of software stocks. In the current market environment, this group can grow earnings rapidly and in a historically-low interest rate environment, the group deserves nose-bleed-type PEs. But it would not be unusual to see a big market scare just before earnings begin to come out in a few weeks. Could we see another 5% drop to test that rising 50 day SMA? Absolutely. Would I bank on it? No. I’ve said for the past three months that this selloff was much, much different than 2008. Yes, there are certain industries like airlines ($DJUSAR) and hotels ($DJUSLG) that are experiencing difficulties similar to what the banks went through during the financial crisis, but there has also been a TON of accumulation of areas that continue to perform well – even during the pandemic. I don’t know when the short-term selling will end. Maybe it’s later today. Maybe it’s next week. But I do firmly believe this selling will once again be met with accumulation, at least with respect to the stronger pandemic industries.

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