Is AI (and the stock indexes) in the process of topping out?
DOW Friday Closing Price - 49499
SPX Friday Closing Price - 7233
NASDAQ Friday Closing Price- 27710
RUT Friday Closing Price - 2812
The bulls were once again able to confirm the breakout into new all-times high, having made them again this past week. What made this confirmation even more compelling is that it occured the week where many important economic and earnings reports came out, meaning that the breakout was not only by the charts but fundamentally as well. The indexes did close near the highs of the week, suggesting further upside will be seen this week. In the SPX that is above 7272, in the NASDAQ that is above 27787, and in the RUT that is above 2815. The DOW continue to be the laggard, given that the bulls have not yet been able to make new all-time highs. Nonetheless, they did get close with index getting up to 49988 and the all-time high weekly close being at 50115. The index did close in the upper half of the week's trading range, suggesting further upside above last week's high will be seen this week.
Having said all of the above, the indexes have experienced 5 green weeks in a row, with the NASDAQ rallying 17.8% and the SPX rallying 13.4%. Much (90%) of this rally has been AI stocks and it is believed the prices presently seen have already factored in what that industry will offer in the future (Goldman Sachs says the future gains for the AI industry have already been factored totally, into the price of the stocks = Goldman Sachs Says the AI Boom May Already Be Priced in - Business Insider). As such, further upside seems to be quite limited.
In addition to the statement above, NVDA generated a negative key reversal week, having made a new all-time high (after it reported better than expected earnings) but then went below the previous week's low and closed red and on the low of the week, suggesting further downside below last week's low at 197.12 will be seen this week. Such action in the face of good news is strongly suggestive of a top to the rally at 216.83 having occurred. Without the stock going higher, it is difficult to imagine the indexes going higher, especially with the DOW (and its 30 stocks), not being able to make new all-time highs.
In addition and using the SPX index as the key one to follow, Goldman Sachs and Citigroup (to name the key analysts) gave a 7600 objective to be reached by year's end. Nonetheless, that objective was based on the projections for AI, and it was given at the beginning of the year. Having seen what happened to NVDA this past week, those projections might change. Nonetheless, and keeping that projection as still valid, it means that based on last week's high at 7272, further upside of 4.4% might be seen. Considering that there is no established support in the index until the 6800 level is reached, it means that buying the index here offers a 4.4% gain versus a 6.4% risk. Such a reward-to-risk ratio is not something that big traders are easily willing to do.
What this means as of today, is that the charts are now key to what trading is done. In looking at the daily charts, both the SPX and the NASDAQ show a bullish flag formation that were broken to the upside last week suggesting quite a big more upside is to be seen this week. If that formation breakout is negated (a daily close in the SPX 7173 and in the NAZ at 27305), it will begin to generate selling interest. If the following intraweek levels are broken (7046 in the SPX and 26877 in the NAZ), the selling interest will increase incrementally.
This week and on Tuesday, the ISM manufacturing report is due out. It is expected to be 54.1%. On Friday, the Jobs report comes out and it is expected to be 85K, On the earnings front, none of the big 5 are due out but with AI being the key issue right now, there are 4 earnings reports on AI companies due out this week (AMD (Tue pm), PLTR (Mon pm), ANET (Tue pm), and LITE (Tue pm). This means that Wednesday could be a telling day.
This is what I found this weekend as to what is happening and what are the possibilities as to what is to come. With AI being the key issue in the market this year, we could be seeing a top being formed, beginning this week.
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