Technology bears on Friday almost landed the knockout blow, however, in the end, they were the ones being pummeled, states Jon Markman, editor of Strategic Advantage.

The Nasdaq 100 (NDX) reversed an early loss to close at 11,090, a gain of 2.8%. More importantly, there were signs of capitulation in big technology shares and strong buying for leadership stock groups. 

Tesla (TSLA) tumbled 7% early Friday to a new low on news of further price cuts in China. Yet shares closed up 2.5% as trading volume swelled to 221 million shares. This one-day reversal in Tesla shares mirrored similar reversals for Apple (AAPL) and (AMZN). Meanwhile, shares of Broadcom (AVGO) and KLA Corp. (KLAC), market leaders since the October lows, zoomed higher. 

If bulls can get laggards to bounce, while semiconductor winners break out, bears are in big trouble. I expect bears to concede a rally next week for the benchmark NDX to 11,368, its 50-day moving average. The next line of defense beyond that level is 12,222, the 200-day moving average. Critical support for the benchmark is 10,671.

The QQQ Loop Trade: The following order was sent Friday but did not fill. Continue to bid as instructed below.

Buy the ProShares Ultra QQQ (QLD) at $34.85 lmt gtc. The QLD is an exchange-traded fund that delivers two times the daily performance of the Nasdaq 100 index. If filled, place a new order to sell half of the position $36.66 lmt gtc, and half at $37.49 lmt gtc. Place a new stop loss order at $33.30 stp. If this trade works, the potential upside target is +5.2% and +7.6%. The potential downside risk is -4.4%.

The Backstory 

The Nasdaq rose 2.6% to 10,569.3 and the Dow advanced 2.1% to 33,629 on Friday. Materials posted the biggest gain, followed by technology, and real estate, with all sectors finishing in the green. Breadth favored advancers seven to one. There were 150 new highs vs 122 new lows. The leaders were Merck & Co (MRK), Novo Nordisk (NVO), Caterpillar (CAT), TJX Companies (TJX), and Chubb (CB).  For the week, the Dow rose nearly 1.5%, while the S&P 500 and the Nasdaq advanced 1.4% and 1%, respectively.

In economic news, nonfarm employment increased by 223,000 last month following a downwardly revised 256,000 gain in November, the Bureau of Labor Statistics said. The consensus on Econoday was for a 200,000 rise. Monthly average hourly earnings grew 0.3%, slower than the 0.4% gain modeled by analysts, while annual wage growth came in at 4.6%, compared with the consensus view for a 5% rise.

The probability of a 25-basis-point increase in the Fed funds rate in February jumped to 74% on Friday compared with 63% on Thursday, according to the CME FedWatch Tool.

The report indicates a still healthy labor market "with some easing of wage pressures," Oxford Economics said. "However, both job growth and annual earnings growth remain above the pace the (Federal Reserve) sees as consistent with slowing inflation, leaving the Fed on track to continue raising interest rates," the firm added. The US two-year yield plunged 19.5 basis points to 4.26%, while the ten-year rate fell 15.7 basis points to 3.57%. This is good news for growth stocks.

US services sector activity in December contracted for the first time since May 2020 amid a sharp pullback in new orders, the Institute for Supply Management said. The ISM purchasing managers' index last month fell to 49.6 from 56.5 in November. The consensus on Econoday was 55. It’s a big differential, but no longer surprising. The West Texas Intermediate crude oil futures were almost unchanged at $73.64 per barrel. My expectation is that crude will resume its advance.

In company news, Costco Wholesale (COST) said December net sales rose 7% year-over-year. UBS Group AG Registered (UBS) raised its price target on the discount retailer's stock to $600 from $565 while keeping its buy call. Costco shares jumped 7.3%, the biggest gainer on the Nasdaq and the second-best on the S&P 500 (SPX).

Learn more about Jon Markman here...