Investing.com | Jan 09, 2019 10:01AM ET
Stocks have been rallying on hopes that the world’s two largest economies, the US and China, might finally put to rest their trade differences. Talks between the economic superpowers were extended for a third day, today, on reports their differences have narrowed.
A resolution to the lingering trade dispute would help mega caps since these multinational companies rely on exports to boost revenue, which would decrease on the burden of rising tariffs. At first glance, this narrative could explain why the NASDAQ Composite gained 1.08% yesterday.
So why then has the small cap Russell 2000, an anti-trade proxy, outperformed during this current rally? If tariffs are set to ease on a resolution to the trade spat, small caps should fall as the smart money moves back into large caps.
Though oil price volatility and Fedspeak have had an impact on energy and financial shares respectively, it's been technology stocks that have been leading the broader market higher—and lower. They're particularly sensitive to positive trade developments, often suffering significant selloffs on trade setbacks.
Why then wouldn't the tech-heavy NASDAQ be the current rally leader? Perhaps informed money knows something the rest of us don't?
Could it be they aren't buying into the possibility of an actual deal? The NASDAQ Composite's technicals certainly signal that could be the case. Tech shares are about to lead the market lower yet again.
Yesterday, trading on the NASDAQ Composite formed a Northern Doji, which is also a Hanging Man. Both variations—combined in one candle, in this instance—follow a rally. The Northern rally suggests the market is overbought, as bulls run out of steam.
While in itself that doesn't necessarily mean an immediate price reversal, it suggests that, as the Japanese say, the market is tired. It indicates that the rally is vulnerable and that other factors may weigh on the rally, slowing or even ending it.
When additional technical signals emit alerts, especially at important market junctures, the bearish implication of a Northern Doji is amplified. In this case there are six things to be aware of:
Whether because of trade talks not succeeding or another as yet unknown reason, the NASDAQ Composite is showing broad and deep weakness.
Conservative traders would only bite if the upward correction is full, reaching the channel top, followed by at least one long, red candle engulfing a green or small candle of either color. Then, they’d wait for a pullback, for an entry closer to the resistance and their stop-loss, to reduce exposure and increase risk-reward ratio.
Moderate traders might risk a short without waiting for the price to retest the channel top, if the price closes lower later today. Then, they may wait for a retest of yesterday’s high, for a better entry.
Aggressive traders may enter a short immediately.
Written By: Investing.com
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