Nasdaq-100 Index

Technology stocks are experiencing heavy selling pressure

Jan 20

Dear investors,

In this free newsletter we are providing technical and sentimental analysis to see if the United States Nasdaq-100 index is going to decline further or if the index is about to reverse.

The sell off in (big) tech companies was caused because of the fear in the upcoming interest hikes from the Federal Reserve. For now the hike in rates will be departed into 3 steps to smooth out its impact in the economy. While this is not a bad thing, investors are taking a close watch to bonds, especially the US Government 10-year yield bond.

The 10-year bond is at the moment of writing trading above pre-pandemic levels (2-year high), indicating that investors are leaving growth stocks to value stocks and bonds to withstand the upcoming interest rate ‘storm’.

4h Chart

With the Nasdaq-100 falling more than 10%, it has official entered the correction zone. With a heavy decline like that, we are interested to see how much fear there is in the tech market and how we as investors can benefit from it.

If we focus on the 4h chart above, you can see that we have drawn a low timeframe ascending channel with a possible bottom on the right. The reason why we believe we have a potential bottom is because of the divergences displayed on the technical indicators (marked with white arrows). Both the RSI and the MACD indicator is making higher highs, despite the index price making lower highs. This tells us that the latest downtrend has less momentum behind it, what can be a sign of a potential reversal.

Daily Chart

If we take a look at the daily chart, we can see that we broke out of the mid-term ascending channel. While this is a bearish development, we can see that the 200 Moving Average (MA) was used as a buying opportunity (support).

The RSI indicator is back at around 35, in the past 24 months when the index was at that level it indicated as a significant bottom what started a new uptrend. While we can use past price movements and technical readings to our advantage to make better future decisions. We have to remember that growth stocks are less attractive right now with the upcoming increase in interest rates.

We see two possible scenarios in the coming days:

Bear Trap (green line) - If we snap back above the (white) local trend line, we can resume the multi-year uptrend and we would buy on the trend line if the retest was successful (back to support).
Rejection (red line) - If the index does not break the local trend line and is getting rejected from it, we are selling our positions because the potential to decline much further is highly likely.

Sentiment

To end we would like to take a look on how much confidence there is in the market. As shown above, the indicator is getting back towards the green line. If the indicator crosses the green line it tells us that there is excessive pessimism in the market.

Almost every time a reading above the line occurred, a local bottom soon followed.

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This newsletter is for interest and learning purposes only. We are not financial advisors and you should always do your own research before making trade/investment decisions. We like to see ourselves as a helpful addition to your research.

Patellic