Why Nasdaq Index Could Retest December Lows

Last year, US stocks had a difficult year with the main indices ending the year in bear territory. Technology stocks such as Apple declined sharply as investors started to worry about their growth prospects for the year. Apple was particularly hurt as investors worried about its growth at a time when the demand for its products is declining.

This year, Nasdaq, which is mostly made up of technology companies has gained by almost 5%. This rally has happened at a time when the appetite for US stocks has increased despite the government shutdown.

Even with the gains in the index, there is still more need to worry. First, valuations in the technology sector are a bit stretched with most companies trading at more than 40X forward earnings. Second, there are concerns about the growth of a number of companies. Yesterday, investors cheered when Netflix announced price increases on its packages. Such news before earnings release is an indication that its growth could be softening. Third, there are concerns about the general growth of the economy. Therefore, this earnings season will be very important for the index.

This year, the index has risen from $5825 and reached a high of $6685. On the chart below, the price of the Nasdaq index has moved above the 21-day and 42-day EMAs. The Relative Strength Index has moved to almost the overbought level of 70. Even with all the optimism, there is a likelihood that the index will move to retest the December lows.

(Click on image to enlarge)

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