Two weeks ago, I explained how I saw NASDAQ peaking and warned about a correction. The correction has indeed happened but I also mentioned that it was too early to tell if it would crash. Things have become clearer now and this post is to update on where I think NASDAQ could go to.
After the FOMC meeting last week, the US stock market had a sell off after Jerome Powell indicated that interest rate will stay near zero for next three years until US get back to maximum employment and 2% inflation.
Market perceived the Fed has exhausted its options and has limited tools to stimulate the economy.
That said, many technical analysts saw the correction as a healthy one and were calling for buys on possible rebounds from the 50 day moving average. But I beg to differ.
The S&P 500 index has broken below the 50 day moving average. This doesn’t look good.
The last time this happened was during the earlier part of this year when Covid-19 struck fear in the market and the index declined 35% from the top.
On a longer term chart (see below), we can see that the S&P 500 has been trending strongly since 2009. I believe the Fed’s quantitative easing has play a part in it.
The purple line on the chart is the 200 day moving average while the red line above it was plotted by adding a 10% premium and the red line below it was at a 10% discount.
It was a significant event when the S&P 500 peaked at the upper end of the channel – it meant that a strong correction was looming. This channel has worked very well since 2009 and I believe it would hold true this time round too.
If so, the S&P 500 may hit 3,100 at the 200 day moving average support.
If the sentiment continues to be bearish, it can decline further to 2,560, the lower end of the channel.
I drew the blue trendline on the chart (see below) showing that NASDAQ has been supported by it since the recovery in Mar 2020. That was a good 6 months before NASDAQ broke below the trendline.
It is likely that NASDAQ could hit 10,170 as a near term target. If this support doesn’t hold, we might see NASDAQ going to 9,725. I would expect NASDAQ to stage a good rebound if it ever goes there.
Zooming into the big tech stocks which are represented by FANG, I observed that this group was the first to break below the 50 day moving average.
There will be more downside risk if FANG cannot hold above the lower blue trendline that I have drawn (see below).
The US stock indices look weak and there’s more room for the correction to continue.
I may be wrong but most importantly I have done up my trade plan to the best of my knowledge of the current situation so that I have something concrete to act on. No plan is static and I will continue to adjust as the market changes.
Warning and Disclaimer: Please do not take this as investment advice. The above are my views and not meant to be investment advice. My objective and risk tolerance may differ from you. Also, you can lose money trading the markets.