After a rough start to the first half of 2022, stock market conditions are improving so far in Q3.
For starters, the NASDAQ is now trading above its 20-day exponential moving average.
A move above the 20-day EMA is a reliable signal to know when an index may have bottomed.
However, the NASDAQ’s bullish price action of July 13 and 14 is what really caught our attention!
On both days, the NASDAQ Composite gapped sharply lower on the open, but reversed to close near the intraday high.
In the process, it successfully defended the higher low that formed around 11,000 several weeks ago:
The price action of July 13 and 14 was important, as the index could have easily gapped down and rolled over–but it did not!
This indicates a definitive change of character in the stock market (at least in the short to intermediate-term).
Has the NASDAQ bottomed out?
Technical market conditions are clearly improving in the short to intermediate-term, but it’s impossible to predict if a longer-term bottom has formed.
Although market conditions are improving, the NASDAQ still has quite a bit of work ahead.
It must first prove it can hold above its newly reclaimed 50-day MA.
Next, the tech-heavy index must overcome resistance of its prior swing high (11,800 area).
If it fails to do so, then we could be in for more choppy price action within the month-long base of consolidation.
Emerging leadership in the Healthcare sector
If the stock market is headed higher, it’s important to focus on top relative strength sectors and emerging leadership.
The Healthcare sector has started showing new leadership, with S&P Biotech ETF (NYSE:XBI) setting higher highs and higher lows above its 50-day MA.
XBI is clearly showing relative strength, as the NASDAQ and S&P 500 have not yet set higher highs.
The S&P 500 is still below its 50-day MA as well.
Below, notice that XBI is now trading in a tight range after a strong thrust up:
Above, note the relative strength line (RS line) vs the S&P 500 has already broken out to new highs ahead of price.
Along with pattern relative strength, the RS line is a quick and easy way to help spot the strongest stocks in the market.
After spotting relative strength in Healthcare, we began scanning for the best stocks to buy in the sector.
We are already long medical products stock Lantheus (NASDAQ:LNTH).
LNTH has been trading in a fairly tight range over the past few weeks, and is one of the few stocks that remained in an uptrend through the first half of 2022.
We initially bought LNTH after it pulled back to 50-day MA support on July 11.
The buy entry was based on the big volume breakout above the 50-day MA on July 8.
We then added to the position on July 14, as LNTH pushed through the $68 pivot area:
We stayed out of harm’s way by remaining mostly in cash throughout the major weakness of the first half of 2022.
Now, as long as market conditions continue improving, we will gradually increase portfolio risk exposure by focusing on low-risk buy entries in top relative strength stocks and ETFs.