On 3 Sep 2020, I posted it on Facebook that Nasdaq is at risk of a correction.
I had predicted an imminent correction on Nasdaq on 28 Aug when the price complete its cycle but the market with its strong momentum went higher for the next few days. The imminent correction was confirmed by the blow up in volume on 31 Aug and 2 Sep.
Fortunately or unfortunately, my trade plan was right as Nasdaq dropped almost 5% after it closed on 3 Sep 2020.
Nasdaq went on to lose 1% and 4% in the subsequent trading days, and it officially went in the correction territory (-10%).
Let me explain the warning signs that I foresaw.
I use a trading technique known as price action and volume analysis. The trendlines which you see in the charts are drawn over the years and they become more valuable overtime, as they form critical support and resistance lines that help me interpret the price actions.
On 31 Aug 2020, the price crossed the Key Support 1 of my trendlines with heavy volume. On 2 Sep 2020, Nasdaq went up higher and cleared the Key Support 2 on high volume too.
These ain’t normal – you don’t want to see prices making new highs and breaking trendlines on high volumes because they are signs of distribution. There were big amount of selling for those who were exiting the market, they probably collectively felt that prices were too good not to realise their profits.
Hence, the alarm bells rang in my head, and I called for a possible correction.
What’s next for Nasdaq?
That’s the more important question.
I don’t profess I will always be right but my trade plan has served me well for the past two decades, and this is what it says:
After this correction, it would be difficult for Nasdaq to stage a rebound. It must break the new high convincingly in order for the bull to resume. However, it is likelier that we will see volatility in the price movements and jumping within the trendlines that I have drawn. It will be difficult to trade and I would think it is best to stay out.
But we would need to watch that orange trendline which is at about 11,100 (see chart above). If Nasdaq break below this line, it might hit 10,750 or even 10,450 and go into crash mode.
Hence, it is still too early to say Nasdaq is crashing.
Let me give you one more stock…
Bonus: Tesla correction isn’t over yet
Tesla is one of the hottest stocks and recently it has corrected hard – it fell 21% on 8 Sep 2020. But my trade plan says the worst isn’t over yet. The price action looks weak.
It could first fall further to $359 and if it breaks below that, it could go further down to $297. That’s another good 20% room to fall!
Why I rely on trade plans
The future market movements are never definite and are probabilistic. You would have noticed I used phrases such as, “if it goes here, then it would likely go there.”
Hence, my job as a trader is to identify the critical levels where prices have a high probability of gravitating toward. I cannot stress enough on the importance of trade plans. You need to plan out your trade several steps ahead like a chess master. It is hard work if you don’t like it.
That’s all folks. I hope it gives you some perspectives how the share prices could move in the short term for the tech stocks.