Chart Of The Day: Cyclical Reversion Boosts NASDAQ In Short Term

US stocks jumped yesterday as earnings were not as bad as anticipated. The NASDAQ outperformed as mega tech earnings beat low expectations, while value companies missed estimates.

Note the irony.

Technology stocks are jumping as lower earnings expectations have been beaten.

Meanwhile, bank earnings have missed expectations which were relatively higher than last year sending the sector lower.

Another layer of irony is that bank leaders said they do not think a recession is underway even as they underperform growth stocks, which is consistent with the outlook that a downturn is coming.

Growth stocks have outperformed value sectors by a rough factor of two in the year's first five months.

Last month, the lead technology shares over cyclical stocks halved to just a 0.25% lead. I argued that the market might have begun a rotation reversal into growth. While rising rates tend to benefit economically sensitive sectors, that is only because of economic expansion.

However, as the economy is slowing and may even be heading into a recession, demand will fall for all the sectors that benefit during economic growth, putting growth stocks back on the map.

Even if I’m right, and investors do increase the weight of growth stocks in their portfolios, it doesn’t mean the NASDAQ will necessarily exit the bear market, just that its descent will be slower. Let’s see what this looks like on the chart.

NASDAQ Daily

The price completed an Ascending Triangle, a pattern depicting how the balance of market forces turns into demand. Buyers have absorbed all available supply within the triangle and raised their bids to find more discerning sellers at higher prices.

That upside breakout will presumably trigger a technical chain reaction. A short squeeze and triggered longs should push the index higher. Then, outside traders can join, and opportunistic bears can participate in the rally.

The price jumped above the 50 DMA, which resisted the pattern. The 100 and 200 DMAs reinforce the Falling Channel top from both sides. The MACD and RSI are both rising, demonstrating that a broad price measure and momentum support the price rally. They both also broke their respective resistances.

The Ascending Triangle is inherently a bullish pattern, and its intended target is reinforced by its development at the bottom of the channel. The triangle's implied target jives with the channel top.

Trading Strategies

Conservative traders do not trade against the primary trend, as the odds of a reversal along with the long-term trend are higher. They will wait for a short after the channel top reasserts resistance.

Moderate traders will wait for at least another daily close above the triangle to avoid a bull trap.

Aggressive traders could enter a long at-will, provided they accept the higher risk proportionate to the higher rewards of moving before the rest of the market.

Trade Sample - Aggressive Long

• Enter: 12,300
• Stop-Loss: 12,000
• Risk: 300 points
• Target: 13,200
• Reward: 900 points
• Risk-Reward Ratio: 1:3

Disclaimer: The author currently does not own any of the securities mentioned in this article.