Nasdaq 100: Guilty Until Proven Innocent

The recent stabilisation of the stock markets has raised hopes that we may have seen a near-term bottom for equities. This view has mainly been supported by central banks’ desire to hold down interest rates at or below zero, while up until today, oil prices looked like they had also formed a base. Today however, question marks have been raised once more after some of the world’s large oil exporting countries merely made a contingent agreement to "freeze" (rather than cut) oil production at near record levels. This caused oil prices to fall on disappointment they failed to agree on a production cut. Meanwhile economic data has deteriorated further. At the start of this week, we have already learned about a 0.4% contraction in the Japanese economy in the fourth quarter of last year, which was worse than expected, while the latest Chinese trade figures also showed sharp drops in both exports and imports.  Still, the markets have held their own relatively well today.

While no one can say for certain where stocks are headed, most people will agree that they are not out of the woods just yet. Indeed, many still believe this is just the start of a more severe correction. In the short-term, price action is our best guide. On that front, the chart of the Nasdaq 100 could provide a strong indication about the market’s next move, for at the moment it is trading in no man’s land, between a rock and hard places.

As can be seen from the daily chart, below, the Nasdaq 100 has reached a key technical resistance area between 4100-4130. This area was previously support, while a bearish trend line also meets the 21-day exponential moving average here. The conflux of all these technical indications suggests that at the very least we may see a small pullback from here. In fact, this move was already underway when this report was being written. What happens next will depend on price action around the previous resistance at 4045. There is a possibility that this level could now turn into support, leading to further gains. But should the index break below here then there is little further support seen until 3905, which was the low from 2015 and briefly breached on a couple of occasions already this month.

But with the Nasdaq managing to hold its own above the 3905 level on a daily closing basis, there is a possibility we may have seen a false breakdown reversal pattern unfold there. This view is supported by the positively diverging RSI, which points to weakening of the selling pressure. But as the trend is still bearish, with the moving averages in the "wrong" order and the downward-sloping trend still intact, it is important not to read too much into it.  The way I would interpret this situation is "guilty until proven innocent." For that reason, bullish traders should remain nimble and wait for further confirmation.

If the Nasdaq breaks above the highlighted region of 4100-4130 then there is an increased likelihood that we may see a more profound recovery.  Conversely, if support at 4045 breaks then the short term outlook would flip back to bearish. And if the 3905 level finally gives way on a closing basis then all bets are off. In this potential scenario, the next stop could be at the 127.2% Fibonacci extension of the previous upswing, around 3680.

Figure 1:

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

The markets are moving. Stop missing out.