On Tuesday, European stocks and US futures were rising ahead of the NY session on signs that Russia-Ukraine tensions were easing. Of course, there are no guarantees the de-escalation will continue.
Still, growth stocks, as represented by the technology-heavy NASDAQ 100 index, have been rebounding from their sharp decline. After a 15.5% correction for the benchmark since late December, some analysts were convinced a bottom was in the making as of last week. However, technical analysts would have cautioned that the trend was continuing to weaken.
And sure enough, after news broke on Friday that Russia might be making a move into Ukraine sometime this week, the tech share plunge that ensued seemed to have put paid to the presumption of a bottom.
Fundamentals are also creating headwinds for growth shares, most significantly via spiking Treasury yields. Yields are a leading indicator of upcoming higher interest rates. They also signal higher borrowing costs which tend to move investors out of highly valuated stocks—such as technology shares at their current levels—and into less frothy assets whose valuations are more justifiable.
From a technical perspective, the NDX's uptrend came into question when buyers and sellers stopped propelling the rising series of peaks and troughs, which allowed the price to fall out of its rising channel.
As well, the price may have completed a rising flag, bearish after the 14% plunge between the Jan. 12 high and the Jan. 24 low.
Technicians may argue as to where the bottom of the flag actually is. The base is lower if they include the Jan. 28 low (red). Though the price still closed below it, yesterday's High Wave candle may also trigger a reversal to a rally.
On the other hand, if one ignores that day's intraday low, the bottom is much higher. Even if prices rebound now, there will likely be a return move to retest the bottom of a completed bearish pattern. We're more inclined to go with that second interpretation, though we would be more committed to it if the volume on that day had been markedly higher.
The more bearish view would still rely on the moving average break down: the 50 DMA crossing below the 100 DMA and the price confirming its resistance amid the flag development after crossing below the central MA during the flag pole, the initial plunge.
Trading Strategies
Conservative traders should wait for a new low before considering a short, below the Jan. 24 trough, followed by a rebound that fizzles.
Moderate traders would short any resistance at the narrower flag's bottom (black).
Aggressive traders could enter a long contrarian position, counting on either the High Wave candle at the bottom of the red flag or a return-move of the black flag's formation.
Whatever your risk aversion, you should trade according to a coherent plan. Here are the basic requirements:
Trade Sample - Aggressive Long Position
- Entry: 14,200
- Stop-Loss: 14,100
- Risk: 100 points
- Target: 14,500
- Reward: 300 points
- Risk-Reward Ratio: 1:3