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 appetite for US stocks has increased despite of 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.

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