The Nasdaq has started to correct lower alongside the S&P500 after the tech-heavy index failed to make an upside above the 13,000 level, leaving further scope for a sizable downside correction.
The most important factor of all for the Nasdaq is what will the Federal Reserve do. Basically, the Nasdaq’s fate in 2023 will come down to is ultimately Jerome Powell.
The sector is intrinsically tied to interest rates, and if inflation does continue to come down and a pivot halfway through 2023 is in play, then the Nasdaq will have slack to make a run.
Russia’s war in Ukraine is still ongoing. The threat of a recession still looms large, with the burden of high-interest rates felt across the economy. Corporate earnings have thus far been soft, so the Nasdaq does look overbought with a 15 percent rally so far this year.
Traders’ sentiment towards the Nasdaq is still very bullish, which could hint at more downside as the retail crowd is not yet overheated on the bullish side, which is worrying.
According to the ActivTrader market sentiment tool, only 59% are bullish towards the index despite a 15 percent rise this year. Based on this sentiment reading I think we could see more felling towards the leading US Tech index continue over the coming days.
The Nasdaq index on the four-hour time frame has invalidated a near technically perfect head and shoulders pattern. The price has been dropping sharply this week and may move towards the head of the invalidated pattern.
So, the risk is now that the index is going to make an even larger head and shoulders pattern. A drop under 12,200 and the index could be at risk of unwinding all of its recent gains.
The Nasdaq index is currently bullish in the medium-term, however, the price is currently starting to move away from key trendline resistance and shows a large head and shoulders pattern.
If we see a continuation lower, we could well see a test towards the index’s 200-day moving average, close to the 12,000 level for a major trend test.