Nasdaq Technical Analysis
The Nasdaq has been trending higher for many moons now and seemingly shows no intention of slowing down. The greatest bull run ever started with the major correction also known as the Global Financial Crisis (GFC). Before we had the COVID-19 global lockdown recession in 2020, the GFC was considered by many to have been the most serious financial crisis since the Great Depression. It is now the dip before the exponential explosion higher. Even the COVID-19 recession which lasted 2 months according to the tech stocks looks innocuous. The current all-time highs are several thousand points higher than the 2021 open, which had hinted at a possible bad year for the equities markets. On average, over the last 20 years, if the first month of the year is negative, the year ends in the red. The speed in which the rise of the Nasdaq has occurred is worrying for those that can’t justify these levels. The last 15 months has seen the Nasdaq rise from the lows of March 2020 at 6,629 to today’s 15,393 making disbelief understandable when you consider the move in the last year has more than doubled the Nasdaq valuation since March 2020.
The weekly chart with 3 exponential moving averages 20,50 and 200 has kept many trend following investors on the right side of the move. With 2 dips down to the 20 period ema.
In February and May this year allowing those traders to add to their position. There had been worries around rising inflation, steepening yield curves and a move from the tech stocks that had faired so well during the lockdowns. The high growth companies that were being traded on leverage were seemingly out of favour for those that read the news (including myself) but for technical analysts, the weekly averages showed unrelenting dynamic support. The COVID-19 dip which was a daily limit down period for the Nasdaq, found the weekly 200 ema too much in the way of support, so for future reference, if price gets below there we know the Nasdaq is in serious trouble.
Traders will remember the tech stock rally in the late 1990’s, as the dot com boom was making millionaires out of anyone who could buy the dip. A lot of traders made money on the way up, but then lost it as they kept buying the dip into the inevitable crash. The memories of over 2 decades ago keep a lot of traders on their toes and some may have even missed out on this bull run because of the unbelievable gains that the equities have made in the face of some of the worst underlying macro conditions. The one thing that is different this side of the GFC is the amount of hope the Federal Reserve has given the market participants, with their loose monetary policy and Quantitative Easing (QE). As each crisis comes along, the central banks and especially the Fed, step up and say they will do whatever it takes to keep the markets and money institutions from collapsing. They don’t go out and buy the stocks, but they give investors enough of a confidence boost that the pension funds and money managers step into the market again. Even the Fed though lost the ability to give more to the markets last year and they were calling on the governments and Treasury to step in with Fiscal stimulus. This is most likely the main reason for the exponential moves. The Trump administration had cancelled the debt ceiling meaning the US Treasury could pump as much money into the system as was needed. Direct payments went to the US citizens, whether they had lost a job or not. Currently the debt ceiling, further stimulus bills and spending bills are up for debate and should the Biden administration reduce the amount of spending from the Government or in some way default on the US debt, we could actually see an end to the rally in the markets.
While we wait for the politics and central banks to come up with their next move, we can concentrate on what the Nasdaq is currently doing. On an hourly chart we can clearly see the bullish trend from the standpoint of the Bulls take the stairs. Where we have an impulsive move followed by a short correction over time, not correction in price. If we do get a correction in price, we then just need to move to the daily chart to see what levels the next dynamic supporting ema’s comes in for a possible re-entry. Breakout trades have been working for those that have waited for the ema’s to line up across all time frames. As this keeps the trader in the directional momentum moves, which is key for a breakout.
For traders that don’t like taking a range breakout another way to follow along with the momentum is to wait for a “Slingshot” trade. This is when you have two impulsive green candles, followed by a red candle. The red candle is acting like the elastic on a slingshot and as you pull it back the explosive move to the upside should follow. Now, ideally you don’t want any of the proceeding candles that follow the first two impulsive green candles to go much further than the middle of the first impulsive green candles body, but your entry can either be at that level or as price breaks higher than the close of the second impulsive candle in the setup.
In todays trading so far we have seen yesterday’s high get taken, with a false breakout. Resulting in a fall back into the range. This is also known as a “turtle soup” setup made famous by the likes of Market Wizard Linda Bradford-Raschke. Price came back down to test an area of support which was also the volume low node from yesterday, before rebounding higher.
This week we have the Jackson Hole Symposium, which is where a lot of the central bankers would gather for an event hosted by the US Federal Reserve, but for the 2nd year in a row, the event is going to be virtual. This is due to the rising cases of COVID-19 and the Delta variant. The Symposium is important as it gives the Fed especially a chance to announce some important changes to monetary policy and this year traders are expecting details on how the Fed propose to tighten monetary policy. Because of this risk event, we may get a very choppy rest of the week until we get an emotional reaction to the news and then the real move based on fundamentals.
Assuming the bull trend continues, I see no reason not to expect the breakout to the upside of yesterdays range. A breakout-retest-continuation trade would be my favourite trade in this instance.
However, we need to consider that most recent moves are probably on less than solid foundations and that a steep correction could occur ahead or on the news. With this in mind if I were to see a break lower, I would make sure to stand aside until we had a more material change in the higher time frame momentum too.
The sort of place that a bear trend can start is where support becomes resistance, so keeping an eye on Fibonacci levels of impulsive moves in both directions is key. With the 61.8% retracement being particularly useful. Previous day’s highs, lows and mid points are also key levels as are round numbers and psych levels.
If today’s highs are taken and the bull trend continues, we just keep looking for slingshot trades and new range breakouts, with an eye on the economic calendar for Tier-1 risk events like when Fed Chair Powell speaks.