The abrupt reversal in Nasdaq stocks raises a red flag for technicians and signals a possible summer top for the market.
Nasdaq, home to many big techs and biotechs, dropped like a rock in early afternoon trading, in a move that traders said did not appear to have a catalyst other than a rash of selling just before 1:30 p.m. ET in an overbought sector.
“It definitely signals to me it could be a top. I would put the odds better than 50/50 that it could be a top. We’ll only know with the benefit of retrospect,” said Dennis Gartman, publisher of the Gartman Letter. “History shows 70 to 80 percent of the time if you don’t pay attention to an outside reversal day, especially one as material as this, you will regret it.”
Nasdaq Wednesday closed at its third record high in a row and a 13 out of 14 day of gains. For the month to date, it was up more than 3.5 percent.
Scott Redler, partner at T3Live.com, said the reversal was evident in the QQQs, or the PowerShares QQQ Trust ETF, which represents the Nasdaq 100. It opened at an all-time high but then fell below Wednesday’s low of 144.53, a classic outside reversal. The Nasdaq composite fell below Wednesday’s low of 6,416, and was trading at 6,366 in afternoon trading.
PowerShares QQQ Trust, 3 month, bar chart
Source: FactSet
“On Facebook’s earnings, it gapped everything up, and basically they sold the news, causing a big outside bearish reversal in tech. That was a little bit of a red flag. The QQQs were at an all time high,” Redler said. “It’s pure technicals. You open up above a momentum level, go through it, and people start to sell. Technology opened up strong and basically reversed.”
Gartman said an outside reversal day can be declared if Nasdaq closes below the lows of Wednesday.
Nasdaq favorites—the FANG stocks, Facebook, Amazon, Netflix and Google parent, Alphabet—were mixed in the sell off, with Facebook higher after its earnings. Amazon was lower, and it reports earnings later today.
“Amazon was up like 100 points. It’s almost like it stole from its earnings,” said Redler. Amazon made a new all time high of 1,083.31 Thursday morning.
Besides tech, biotech also joined in the sell off. The iShares Nasdaq Biotechnology IBB ETF fell 2.3 percent in afternoon trading.
Transports were also crushed in the sell off. The Dow Jones Transports were down 3.2 percent. The VIX, a measure of market volatility, jumped 7 percent to 10.30 after trading at an all time low this week.
The selloff comes amid warnings from some strategists that the market could see a shallow pull back after going for so long without a correction. The market’s last significant pull back was the 11 percent decline in the S&P 500 that ended in February, 2016.
The S&P 500 fell about a half percent in afternoon trading, to 2465. The Dow held some gains, up 6 points, at 21,717.