NASDAQ's Close Below Key Support Level - Time To Buy?

The most recent FOMC minutes were the catalyst on Wednesday which sparked a sell off in tech stocks, with bank stocks and the energy sector holding steady amidst rising interest rates exposing the vulnerability of tech stocks.

The NASDAQ closed Friday just below an important support level as tech stocks tried to stabilize after slipping more than 1,000 points after the FOMC minutes were released.

While technically the NASDAQ chart hasn't suffered any real damage, any close below the 14,700 level on the index would increase the likelihood of a deeper correction and potentially confirm a double top pattern according to basic principles of technical analysis.

Any undercut of last week's lows would increase the vulnerability of the NASDAQ and increase the likelihood of a re-test of the 200 day moving average.

The NASDAQ 100 as represented by the Invesco QQQ Trust (NASDAQ:QQQ) saw very heavy trading volume on Friday with 72.7M shares changing hands which is 71.2% higher than the typical daily trading volume, a confluence of Fibonacci support for the QQQ lies near $368.5 or -4.05% lower while the nearest confluence of Fibonacci resistance lies near $390 or +2.7% higher.

The vulnerability of the NASDAQ was also reflected by the options market as the increasing amount of puts trading on tech stocks last week steadily increased with several options alerts showing a propensity for puts over call options with one trader trading 1,500 Feb. 18 puts with a 376 strike after hours on Friday for 1.5M in premium, possibly a hedge or even an outright bet on a re-test of the 200 MA, when the OI was a mere 924 open interest. A gap up or down on Monday will confirm the likely direction for tech stocks in the near term.

Apple (NASDAQ:AAPL) is held by nearly everyone, last week's message disclosed to readers that we, along with members of our options trading group, sold our shares and call options in AAPL near $180 last week simply from a technical standpoint and will reload when a mean reversion in the chart coalesces with price, somewhere between $155 and $135 perhaps. In my humble opinion that isn't an unrealistic expectation.

For those of you new to the market, it isn't uncommon for AAPL to mean revert 25-30% in a relatively short period of time once the short term profit taking gets underway. The point being that if AAPl continues to show relative weakness then investors and funds will get nervous, investors will continue to rotate into defensive sectors and sell interest sensitive stocks.

If Apple starts to roll over (we believe it already has begun) then the "stealth" correction we have been seeing will likely manifest into additional profit taking on the stocks that have been leading the market higher, a self-fulfilling prophesy for the NASDAQ potential Double Top outlined above.

The Double Top is thus far unconfirmed until we see it close below the neckline in accordance with basic principles of technical analysis.

The strongest stocks this past week has been from stocks that benefit from rising rates and the recent break-out in bond yields (XLF) and rising oil prices (NYSE:USO), the latter of which is likely the most significant factor of a rising core inflation rate (besides the supply chain disruptions and recent tariffs imposed by the previous administration).

The tariffs have a direct impact on inflation and will undoubtedly be indirectly paid for by the consumer. The rise in interest rates will also be a headwind at some point with stocks and may be the reason behind some of the profit taking we saw this week and the rotation out of tech stocks and into a more defensive posture.

Disclaimer: The author owns stock and/or stock options in SPY, QQQ, BAC, AAPL and TSLA as mentioned above [sic].