Following Thursday’s sharp reversal in the stock markets, the key question is whether we will see any further downside follow-through in this final day of the week, or will dip buyers once again come to the rescue? Either way, we have to be tactically prepared as traders and take action if needed.
The bears certainly seem to be having the upper hand right now, with US futures pointing to a weaker open on Wall Street later.
The markets slumped, rebounded, then dropped again on Thursday to close near the day’s lows. Stock investors were unnerved because of a rapid increase in rate-hike probabilities. Another sharp rise in consumer inflation gave rise to speculation that the Fed will raise interest rates by 50 basis points in March, with several more hikes to follow later in the year. As 10-year bond yields broke the 2.00% barrier, this weighed heavily on technology stocks because of the sector’s overstretched valuations and low dividend yields.
Regular readers will know that I have not been very bullish on US stocks in recent months because of the Fed’s inevitable hiking this year. In my previous post on the NASDAQ 100 in mid-December, I highlighted the potential for a correction. Although the index took its time, it went on to break the trend line and eventually the 200-day moving average:
The NASDAQ has now twice tested the 200-day average from underneath and so far, the bears have resisted. For as long as the 200 MA provides resistance, the bulls should proceed with extra care, especially in light of a rapidly changing macro backdrop.
Thursday’s bearish engulfing candle is clearly another warning sign for the bulls. This has raised the possibility we will see a breakdown below support at 14,500, which could give rise to further technical selling. At this stage, I wouldn’t rule out a revisit of the 14,000 level in the coming days.
But let’s not get ahead of ourselves and as mentioned earlier, we have to be tactically prepared for any scenario. The outlined bearish signals clearly make the NASDAQ a bear candidate today. But at what point will it become bullish again?
There are at least two tactical ways the bulls could take advantage of a potential rally.
The first is to wait for a deeper correction and the formation of a bullish signal such as a hammer, at lower levels—even if it means waiting for weeks. Alternatively, a quick recovery today or in the coming trading days back above the 15,000 level and the 200-day average is arguably an even stronger bullish signal, for this would completely render the bears’ view invalid. As such, we could then see a sharp short squeeze rally.
That being said, my base case is that we will see lower levels on the NASDAQ, and as such I would concentrate on selling into resistance, than buying dips at support until the chart tells me otherwise.