Nasdaq analysis: What now after CPI-related sell-off?

• Nasdaq analysis: risk of correction is increasing
• US bond yields dip after CPI-related gains on Tuesday
• Nasdaq technical analysis shows bullish trend held but could it break soon?

We have seen time and again that the US markets have a tendency to bounce back strongly after a sizeable drop, and that’s precisely what happened again following the CPI-related dump. Index futures bounced back alongside European markets and bonds, before rising further once Wall Street opened. At the time of writing, though, we were witnessing some easing of the rally, which serves as a warning that this time things could be different. Are we going to see weakness creep into the markets as we head deeper into the US session?

Nasdaq analysis: Correction risk is high

This year has seen the US indices hit repeated high despite consistent pushback against expectations of an early rate cut by the Fed, thanks to stronger economic data and a rather slow disinflation process. Mostly stronger earnings and the AI optimism has been behind the rally, but with the Magnificent 7 stocks reaching extremely expensive levels, there is always the danger of a rug pull, soon. Has that process already started in light of Tuesday’s sell-off? That’s the million-dollar question. We will need to see some real commitment from the bears before one can conclude that the strong bullish trend has at least temporarily ended. With most earnings out of the way now, the upside may be limited without a correction of some sort to remove some froth. So, I reckon the risk of a correction is quite high.

Nasdaq analysis: Magnificent 7 need a rest

From a macro perspective, there isn't much on the agenda to stimulate investor enthusiasm today, so the focus will be on whether yields will bounce back and what this may mean for technology stocks in particular. The cluster of technology equities referred to as the "Magnificent Seven," which encompasses Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms, and Tesla, presently constitute approximately 30% of the S&P 500 index. They contributed to more than three-fifths of the S&P 500's overall returns last year. Despite expectations of market diversification in 2024, the opposite has materialised, with an even greater concentration of market leadership. These specific stocks have been the primary drivers behind over 80% of the index's gains this year. It would seem logical for investors to consider capitalizing on profits from these stocks, in light of the big drop we saw Tuesday and the recovery in indices today. Additionally, a rotation into alternative sectors may contribute to a potential correction in the technology sector, impacting the Nasdaq 100 and the S&P 500.

Nasdaq analysis: Technical levels and factors to watch

Source: TradingView.com

The bullish trend line that has been in place since October was tested after Tuesday’s sell-off and held firm. The index bounced back all the way from 17473 to around 17765/70 area where it encountered some resistance after the open.  This area was the last support zone before the index rallied to hit a new all time high. It needed to hold as resistance. If we don’t go back above that level now, then there is a risk the market could fall back to at least re-test the bullish trend. A potential break of the trend line could pave the way for further technical selling, so watch out for that. Below the trend line, there are no obvious short-term support levels to watch until the December’s high at 16970. There is a chance, therefore, we could see a sharp sell-off, if the bulls fail to hold their ground today.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R