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Thursday, the tech-heavy Nasdaq was slammed for a third straight session. Though the drop in tech stocks has undoubtedly accelerated, the drop itself is not a huge surprise. Tech stocks had come a long way before retreating. Markets had entered the historically seasonally weak back half of July as the NAAIM survey showed active investors were on margin – a subtle but accurate warning sign. Meanwhile, the money flow does not illustrate that it is leaving equities entirely. Money is clearly flowing from big tech stocks like “The Magnificent 7” into small cap stocks and the Russell 2000 Index ETF ((IWM - Free Report) ).
Should Investors Buy the Dip in Tech Stocks?
While small caps are clearly leading the market, investors who have not blown out their tech stock positions may want to hang tight. Below are three reasons an intermediate bottom may be here.
Hammer Candles Mark Intermediate Bottoms
Though the past few days have been painful for tech investors, Thursday served an essential purpose. First, the cascade of early selling was evidence of panic selling (possibly a fund blowing up) and a potential washout. Second, though the Nasdaq and many tech stocks finished down, they were able to finish well off their lows, setting up “hammer candles.” We now have a clear area to trade against for many of our stocks – Thursday’s lows. Finally, these hammer candles have proved to be intermediate bottoms in the S&P 500 Index ETF ((SPY - Free Report) ) and the Nasdaq 100 Index ETF ((QQQ - Free Report) ) over the past few years.
Image Source: Zacks Investment Research
“When you sell in desperation, you always sell cheap.” ~ Peter Lynch
Considering my personal experience and Peter Lynch’s legendary track record, it’s worth heading his advice. When possible, I try to wait until the end of the day, at the very least.
RSI is Deeply Oversold
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements to evaluate overbought or oversold market conditions.
Thursday, QQQ’s RSI sank below 34, indicating a deeply oversold level. Jason Goepfert (@jasongoepfert) points out that there is a “Decent track record for QQQ when RSI drops below 34 during long-term uptrends (above 200-day moving average). The only outright failure over the next 3-6 months was Jan 2022 that initiated the bear market.”
Tech Leader Tests Key Technical Level
Super Micro Computer ((SMCI - Free Report) ) is a data center/AI leader. The stock has gained more than 3600% over the past five years. SMCI shares are retreating to their 200-day moving average for the first time in ages – an attractive reward-to-risk zone.
Image Source: TradingView
Meanwhile, Nvidia ((NVDA - Free Report) ), what I deem as “the true market leader,” put in a large hammer candle. If leaders like SMCI and NVDA can hold in at these levels, it will be evidence that a bottom is in. As the saying goes, “So go the leaders, so goes the market.”
Bottom Line
Tech stocks finally broke this week. However, 3 data points suggest that the worst might be behind the market, and an intermediate-term bottom may be on the horizon.
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Tech Stocks: Should Investors Buy the Dip?
Thursday, the tech-heavy Nasdaq was slammed for a third straight session. Though the drop in tech stocks has undoubtedly accelerated, the drop itself is not a huge surprise. Tech stocks had come a long way before retreating. Markets had entered the historically seasonally weak back half of July as the NAAIM survey showed active investors were on margin – a subtle but accurate warning sign. Meanwhile, the money flow does not illustrate that it is leaving equities entirely. Money is clearly flowing from big tech stocks like “The Magnificent 7” into small cap stocks and the Russell 2000 Index ETF ((IWM - Free Report) ).
Should Investors Buy the Dip in Tech Stocks?
While small caps are clearly leading the market, investors who have not blown out their tech stock positions may want to hang tight. Below are three reasons an intermediate bottom may be here.
Hammer Candles Mark Intermediate Bottoms
Though the past few days have been painful for tech investors, Thursday served an essential purpose. First, the cascade of early selling was evidence of panic selling (possibly a fund blowing up) and a potential washout. Second, though the Nasdaq and many tech stocks finished down, they were able to finish well off their lows, setting up “hammer candles.” We now have a clear area to trade against for many of our stocks – Thursday’s lows. Finally, these hammer candles have proved to be intermediate bottoms in the S&P 500 Index ETF ((SPY - Free Report) ) and the Nasdaq 100 Index ETF ((QQQ - Free Report) ) over the past few years.
Image Source: Zacks Investment Research
“When you sell in desperation, you always sell cheap.” ~ Peter Lynch
Considering my personal experience and Peter Lynch’s legendary track record, it’s worth heading his advice. When possible, I try to wait until the end of the day, at the very least.
RSI is Deeply Oversold
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements to evaluate overbought or oversold market conditions.
Thursday, QQQ’s RSI sank below 34, indicating a deeply oversold level. Jason Goepfert (@jasongoepfert) points out that there is a “Decent track record for QQQ when RSI drops below 34 during long-term uptrends (above 200-day moving average). The only outright failure over the next 3-6 months was Jan 2022 that initiated the bear market.”
Tech Leader Tests Key Technical Level
Super Micro Computer ((SMCI - Free Report) ) is a data center/AI leader. The stock has gained more than 3600% over the past five years. SMCI shares are retreating to their 200-day moving average for the first time in ages – an attractive reward-to-risk zone.
Image Source: TradingView
Meanwhile, Nvidia ((NVDA - Free Report) ), what I deem as “the true market leader,” put in a large hammer candle. If leaders like SMCI and NVDA can hold in at these levels, it will be evidence that a bottom is in. As the saying goes, “So go the leaders, so goes the market.”
Bottom Line
Tech stocks finally broke this week. However, 3 data points suggest that the worst might be behind the market, and an intermediate-term bottom may be on the horizon.