Trade of the week: short Nasdaq 100

Current trade overview: short position

In the current market environment, a trading opportunity has been identified with the US Tech 100 index. The strategy involves taking a short position following Friday's significant decline, which saw the index drop over 2% as investors grew increasingly concerned about economic conditions and inflation.

Trade setup

• Entry point: short the US Tech 100 at 21,870, looking to sell into any short-term bounce
• Stop loss: set at 22,241, positioned above last week's all-time record high to limit potential losses if the market moves against the position
• Target: aim for a downside target of 20,700, representing a significant retracement from recent highs

Risk-reward ratio

This trade offers an attractive reward-risk ratio, with the potential downside target providing room for profit. However, it is important to note that this is a high-risk trade as it goes against the main upward trend of the market. Traders should carefully consider whether this position aligns with their risk tolerance.

Market context

The US Tech 100 recently formed a bearish candle after making a new all-time high above the previous peak from mid-December. Analysis of the Relative Strength Index (RSI) shows negative divergence, with the latest price high corresponding to an RSI reading below that made in December. This divergence pattern typically indicates at least a short-term reversal in approximately 70% of cases, sometimes leading to more significant declines.

The entry strategy targets the midpoint of Friday's Marubozu pattern (a strong bearish candle), which often acts as resistance during subsequent price action.

Previous trade outcomes

Our previous long position on the EUR/USD currency pair, entered at $1.0326, continues to perform well. Traders could have either taken profits or moved stop losses to break-even to create a risk-free position. The longer-term target remains above $1.0750 once the pair clears the January high of $1.0533.

Last week's recommended short position on USD/JPY at ¥152.60 did not trigger as the price came within 17 ticks but didn't reach our entry point before moving lower. While the analysis proved correct, we maintain discipline by not chasing trades after they've moved, as this would require wider stop losses and potentially larger losses on unsuccessful trades.

Cautionary note: while this trade presents a structured opportunity, market conditions can change rapidly. Traders are advised to consider their risk tolerance and market outlook before engaging in this trade, particularly as it moves counter to the prevailing long-term trend.