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Get ready for a steep drop that sets up one more ‘FANG-tastic’ buying opportunity

August 4, 2017
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The Nasdaq’s performance has been just “FANG-tastic” this year.

It has been continuously driven higher by the FANG (or FAANG) stocks — Facebook












FB, +0.00%










Amazon












AMZN, -0.90%










Apple












AAPL, -1.00%










Netflix












NFLX, -0.84%










 and Google parent Alphabet












GOOG, -0.72%GOOGL, -0.77%

FANG stocks have become so dominant that it won’t take a crash to drag down the S&P 500












SPX, -0.22%










  and Dow Jones Industrial Average












DJIA, +0.04%










  as well as, of course, the Nasdaq Composite












COMP, -0.35%










Will those bubble-seeing “pros” finally get a measure of vindication?

I believe a “FANG-tastic” Nasdaq crash is unlikely. Quite to the contrary. While a correction is likely to happen soon, it would be healthy and (once complete) set up at least one more “FANG-tastic” buying opportunity.

Here is a short, medium and long-term risk assessment for the Nasdaq-100












NDX, -0.39%










 .

Short-term risk assessment

The daily chart for the Nasdaq-100 QQQ ETF












QQQ, -0.39%










shows that momentum (RSI) and liquidity (on-balance volume) have slowed compared to price. Negative divergences (red lines) are building.

Negative divergences build as investor conviction wanes. Such divergences can last for a while, but — when they appear after a long up trend — they tend to lead to weakness.

The last time RSI and on-balance volume confirmed the QQQ all-time high was on May 16, when the Profit Radar Report stated that: “Stocks never top at peak momentum.”

Some 2½ months later, momentum is no longer at its peak. QQQ may poke a bit higher, but sometime in the next one to 30 days, it is likely to trade 1%-5% lower than today.

Read:3 reasons a stock-market correction is coming in late summer or early fall

Medium-term risk assessment

The Profit Radar Report issued a buy signal on Feb. 11, 2016. This buy signal was based on technicals, investor sentiment and Elliott Wave Theory.

In fact, Elliott Wave Theory has been an invaluable indicator in recent years. The February 2016 buy signal was later on followed by an Elliott Wave-based “melt-up alert.”

Fibonacci resistance at 143.55 acted as our upside target (see chart).

The weekly chart below includes the most likely Elliott Wave labeling.

QQQ appears to be at or close to a wave 3 top, which is to be followed by a wave 4 correction.

The Fibonacci-based down side target for this (wave 4) correction is 135.53-129.07 (23.6% and 38.2% Fibonacci retracement), which coincides with chart support around 135 and 130.

This means that QQQ could lose some 10% in the next one to three months. A 10% drawdown for the Nasdaq could easily translate into 10%-30% losses for individual FANG stocks.

Although the chart provides a simplified visual (dashed black lines), wave 4 corrections are notoriously choppy, unpredictable, time consuming, and unlikely to be as simple as illustrated.

Long-term risk assessment

Although risk for the next one to three month is elevated, based on investor sentiment, cycles, and liquidity, we don’t expect a major top or 2000-type crash (a detailed analysis of investor sentiment and liquidity is available here).

Rather we see another buying opportunity with the wave 5. We will consult liquidity, sentiment, cycles and technicals near the wave 5 high (projected for late 2017 or early 2018) to assess the risk of a major top at that time.

Simon Maierhofer is the founder of iSPYETF.

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