The Nasdaq has been in a downtrend for 5 weeks now and investors are wondering when the blood bath in tech stocks is going to end. Tech stocks in general have been the most volatile stocks, but over the long term they have been the best performing group. The question on all investor’s minds right now is, do we buy in or do we wait for a solid bottom formation?
The Fibanochi Theory is one of the better tools for correction measurement. The Theory states that a major correction, 20% plus, will retrace at least 50% of a rally’s move. If that support is broken, then it’s heading for a 67%, 87%, 95%, and finally 100% retracement of the rally.
The current rally ended on March 10th, at a high of 5,133, started on October 18, 1998, on which day the NASDAQ bottomed at 1,344, from a major correction. Using the Fibanochi Theory, the NASDAQ's support levels are 3,238, 2,594, 1,837, 1,533, & 1,344. These support levels are found by subtracting the low from the high of the NASDAQ, applying the percentage correction, and subtracting the result from the high. Each time the NASDAQ pierces through one of these support levels, the next support will most likely be tested. On April 14th, the NASDAQ tested and quickly bounced higher off the first support level at around 3,238, and started a rally. The rally was confirmed on April 25th, when all the major indexes rallied more than 1% on higher volume from the prior day, but below average vloume.
Besides looking for support levels, the public's bullishness or bearishness should be examined. If everyone is optimistic, and believes the markets are headed higher, chances are they're wrong. As of this writing, the optimism in the markets was extremely high. In fact, fear hasn't even factored its way into the equation. The belief among most investors, is that this market will pull them out of this jam. Analyst’s are also jumping on this bandwagon, and proclaiming the bear market over. The funny part, these same guys said the previous correction a week before was the bottom. This overall optimism is bearish for the market.
Even though the market has bounced off a key support level, the current rally confirmed, and the optimism high, bear market don't usually end so quickly, especially when optimism is so high, and confirmation of rallies happen on below average volume. But if you're intent on putting your money to work, look for sectors that are exhibiting strength. One such sector is the semiconductor sector. Stocks such as AMAT, NVLS, AMD, MU, and others are near or at their all time highs. These stocks are also exhibiting strong fundamentals. The key to buying these stocks is to keep stop losses close to breakout points. If the current rally fails, these stocks could fall sharply along with the market.
As you can see the signals at this time are extremely mixed. If you have to buy, then buy cautiously. Investors at this time should be focusing on preserving capital and making a buy list for the next bull market. Until then, be patient.