Why the Nasdaq Gap-Up Looks Like Exhaustion to Me!

The Nasdaq posted a gap-and-go last Friday: A gap-up open, followed by a go-take-out-the-stops rally that carried the index higher for the rest of the session.

The rally was fueled by positive results from new-tech darlings Amazon (AMZN) and Alphabet (GOOGL) with support from old-tech darlings Intel (INTC) and Microsoft (MSFT).

So, is this the start of the next leg higher for stocks? Could it even be the melt-up scenario that the financial pundits have been buzzing about?

It’s possible, but I wouldn’t bet on it. A review of last week shows why …

First, the guest of honor — played by the Nasdaq — had a wonderful time at the stock market party at the end of last week.  But not so much the other guests. They didn’t show up.

While the PowerShares QQQ Trust (QQQ) jumped 2%, fully HALF of the stock market sectors I track most closely were DOWN on the week. The Dow was up only 0.01% on Friday, and small-caps fell -0.4%.

Second, market breadth was terrible, and that’s a huge red-flag in my book. Sure, the S&P 500 hit a new high Friday, powered by the mega-cap tech stocks. But the number of declining stocks led advancing shares by the third-widest margin in the last 27 years!

Ditto for the Nasdaq, which posted its largest price gain, and at the same time, the fewest number of rising stocks since 2000 … the year the tech-wreck bear market began!

The Nasdaq was led higher by the toothy grin of the mega-techs … but the rally had no real bite, as many stocks were flat to down.

Third, but what about Friday’s powerful move in leading Nasdaq stocks. Isn’t it bullish? Actually, no! Historically speaking, gap-and-go moves driven by positive earnings surprises has NO lasting positive effect on the market beyond a day or so.

In fact, studies of AMZN and GOOGL gap up moves show the Nasdaq falling about half a percent one week later, with the stock market often flat-to-down over the next several months.

In other words, you could just as easily interpret Friday’s bullish gap-and-go for the Nasdaq as a bearish exhaustion gap. That means stocks have no fuel left to move higher. Only time will tell which is right, but here’s what I’m watching for next …

The Nasdaq is up slightly again today, but already off the highs of the day. Meanwhile, the Dow and S&P are down a third of a percent. That’s a classic sign of NO follow-through buying by investors.

If the market cannot build on Friday’s gains by the end of this week, I expect the next big move will be lower, not higher, just as the E-Wave cycles forecast.

If on the other hand stocks get a second wind and continue to gap higher, then I have mental stops on-the-close in mind for your positions in ProShares UltraShort QQQ (QID), ProShares UltraShort Dow30 (DXD), ProShares UltraShort S&P500 (SDS) and your QQQ put options. Stay tuned.

Last week’s real main event that should make you stand up and take notice, was the latest shenanigans out of the European Central Bank (ECB).

As I expected, the ECB continued its tip-toe tapering policy last week. They decided to cut in half the level of European government (junk) bond purchases, from $70 billion a month now, to about $35 billion a month starting January 1st.

But they also announced extending the bond-buying madness until at least September, and perhaps longer. I’ll take the over on that!

Meanwhile, the Fed ended its bond buying scheme long ago, and last month began reducing the size of its bloated balance sheet. Plus, the Fed has been raising rates, and is widely expected to do so again in December, while the ECB wants interest rates “lower-for-longer.”

This is the perfect recipe to extend the dollar rally vs. euro, which is exactly what our E-Wave cycle predicts.

And that means a high probability of undercutting S&P 500 profit growth, which was entirely fueled by the weak dollar from strong foreign sales. And that could easily stop the stock market rally dead in its tracks.

For now, continue to hold all open positions, and stay alert for more updates and trade alerts. And be sure to join me for our next members-only executive briefing this Wednesday!

Good investing,