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Weekly Index Analysis – Nasdaq
Yesterday was a rotational day in the Nasdaq with the majority of the 100 companies trading near flat with the two largest companies posting losses.
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The Nasdaq weekly is like other large cap indices trending higher, with extreme bullishness ever present and large divergence between the 20, 50 and 200 exponential moving averages. In times of panic the 200 ema has acted as last levels of support and during this reflation trade the weekly 20 ema has acted as dynamic support.
When an asset travels to all-time highs it does get harder to trade as the more times you get in and out intraday, the more likely you are to give back as much of the gains as you are to make any. Whereas in hindsight, buying the dip and holding in this environment would have yielded 7000 points at least. In monetary perspective, the e-mini NQ futures contract is priced at $5 a tick per 1 lot. There are 4 ticks per point, so the $ value of this move if you had held would be more than ($5x4x7000) $140,000. Which is good by anybody’s standards. Let alone a pension fund who could plough thousands of lots into a market like this.
For a lot of funds ‘there is no alternative’ that could bring these sorts of gains. They even have an acronym (TINA). The fact is speculators are also pushing into these markets with margin trades. Imagine starting off with a $10k account and buying the NQ or Nasdaq CFD that follows the underlying index. The higher the price goes, the larger your equity in your account is, the more the margin builds in your account enabling you to buy more positions. Building a position in a trending market is the best way to build wealth.
For those of us that didn’t buy and hold the index when there was blood on the streets in 2020, how do we capitalise on this bull train?
How to follow along
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S&P500 traders have been buying the dip on the daily chart. They have been using the 50-day ema as a guide to initiate new positions. So keeping your eye on that trade is worthwhile. At some point the daily 50 ema won’t hold as support and this will be the clue to savvy traders to consider not buying the dip and maybe waiting for a move into value around the daily 200 ema.
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Nasdaq traders have also found the 50-day ema recently to act as support, but price action in the trend hasn’t offered up as many clean entries as the S&P500.
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Intraday traders are having to look for other smaller areas of support and wait for price to come down to these value areas and clearly reject them. Yesterday’s price action dipped into the medium price of the highest area of volume, before then trading back into the 20 and 50 period moving averages.
The levels of interest on an intraday chart should include the previous day’s high, low and mid-price. You could also mark up the London session open as well as the US session open and the session closes, as this is often a time of most volume traded. The idea being that if buyers or sellers are still present at these high-volume levels, their actions when price returns to them will be significant and we can follow along.
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Trading with the trend is key and from looking at all the higher time frame charts it is safe to say the Nasdaq is in an uptrend. With that in mind, when the smaller time frame charts sync up with the larger time frame momentums direction, waiting for a break higher through some resistance, then waiting for a pull back to test that previous resistance to act as support is a great way to find trades.
Targets in this case were the previous swing high but in a bull trend it could easily have gone higher. The key is to not be greedy and just get out at the most logical place everyone else is looking at. Which invariably is a previous swing high. Now that there is an intraday double top acting as support, those traders who insist on selling a top will have got into the short position and will have their stop losses above the double top highs. Which is where we would target next, as there would be an acceleration through that double top pattern as the stops get triggered.
The trend is your friend until the bend in the end and early warning signs that trends are failing is when your trade idea of buying the dips and waiting for retests of support start to fail as buyers disappear and short sellers pile in. The first leg down is usually buyers cashing in and profit taking. The second wave is when there is a failed high or a new macroeconomic shift and the sellers pile in and just relentlessly hit the bid.
What could go wrong?
Upcoming macro events may be a catalyst for investors to ease up on their buying and to list a few we have risk events from the US Debt Ceiling, continued COVID-19 disruptions, mid-term elections, Fed possible tapering, rising inflation and direct stimulus programmes being removed which will dent the fiscal flows. If the fiscal spending were to increase with the infrastructure bill and if the budget bill gets passed this may also encourage investors to continue buying. In a dystopian world like we had in 2020, the worse things got the more stimulus was pumped into the system which filtered into the equities markets. So not all bad news is bad for the Nasdaq. What we have seen is that rising inflation that is accelerating and the perceived action required from the Fed through raising rates has had negative impacts on the Nasdaq and we had some significant pullbacks which the S&P500 and Dow Jones Industrial Average didn’t have to as large a degree.
The FOMC and Fed Chair Powell especially have said that they are not changing monetary policy until inflation is averaging 2% and there is significant progress towards full employment. Currently the Fed are most concerned about the employment situation and data points out this week will be closely watched.
Today’s ADP data shows private businesses in the US hired 374 thousand workers in August of 2021, compared with a downwardly revised 326 thousand increases in July and well below market expectations of a 613 thousand rise. The high frequency data points like the ADP and NFP are currently not consistently producing expectation beating figures and employment may have peaked in the spring of 2021.
The Labour Force participation rate in the USA is still very low and has some way to go before getting back to pre-pandemic levels. It would require the ADP and NFP numbers to be consistently hitting 1 million new jobs per month for some time.
The Fed’s preferred measure of inflation to watch is the Personal Consumption Expenditure (PCE) index. This is clearly above the 2% target, but the Fed is convinced the small band of durable goods that are causing this inflation will show signs of price stabilisation and a return to the norm and that inflation will be transitory.
A quick example
As an example of how to look for trades when the data disappoints todays ADP number brought the Nasdaq price action into the dynamic support of the m5 chart allowing traders to enter on the 50 ema.
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Targeting the intraday double top and having a stop loss under the data release low meant that the trade idea had at least a risk to reward profile of 1:2 which over time means you only need to be correct on this sort of idea 40% of the time to make decent returns.
Whether you trade on the m5 in line with the daily or weekly or on an H4 in line with the higher time frames, waiting for a pull back into an area of support or value is key. The trade direction is then made easy, you just need to make sure that your risk level is not too far away to be detrimental to the risk reward ratio.
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