Nasdaq 100 stabilises further post-FOMC minutes

​The Nasdaq 100’s swift descent

The Nasdaq 100’s swift descent has so far taken it to its 11,490 one-year low amid soaring inflation, an aggressive US Federal Reserve (Fed) monetary policy, a possible global recession and mainly disappointing earnings from its constituents.

The index, which has been hard hit since the beginning of the year, losing around 28% year-to-date, has been trying to stabilise this week as investors made use of what they perceived to be good buying opportunities at the market’s recent lows, while keeping an eye on the Fed's rate hike cycle.

The minutes from the Fed’s early May meeting showed that most committee members agreed to raise rates by a further 50 basis points in June and July, to quell soaring inflationary pressures. In addition, the Federal Open Market Committee (FOMC) minutes stated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”

The yield in the US 10-year Treasury note was little changed around 2.75% following the 50-basis point rate hike in the Fed funds rate to 0.75%-1%, but US equities bounced, including those making up the Nasdaq 100, after the minutes were released.

Before the FOMC minutes were published, investors were getting increasingly concerned that higher rates may lead to a looming global recession as US inflation climbed to near 40-year highs and risk appetite for US equities diminished.

Technology and growth stocks have been hit hardest by the prospect of higher rates, as the Fed and other major central banks around the world look to combat soaring inflation by tightening monetary policy.

This year’s brutal downturn for high-growth tech stocks, seen by several analysts as overvalued at the market peak in late 2021, has led some to voice concerns about a tech-driven crash similar to that of the “tech bubble” bursting in 1999/2000.

What do the charts say?

From a technical perspective the Nasdaq 100 remains in a downtrend but is showing embryonic signs of at least forming a short-term interim bottom.

Provided that last week’s low at 11,490 on the Daily Financial Bet (DFB) continues to underpin on a daily chart closing basis, further upside looks to be in store for the Nasdaq 100 in the days and weeks to come.

The April-to-May downtrend line at 12,295 is currently being targeted, following Tuesday’s bullish Hammer formation on the daily candlestick chart and the positive divergence which can be seen on the daily Relative Strength Index (RSI). This bullish reversal signal is given when a market makes a new low but an oscillator, in this case the daily RSI, makes a higher low, thus diverging from the price chart.

Most of the time this technical reversal signal leads to at least a temporary trend reversal and sometimes even to major lows being formed. Whether this is the case for the Nasdaq 100 is too early to say but first signs of the index at least holding around current levels, are encouraging.

What needs to be seen for a more significant and longer lasting bullish reversal to gain traction is a rise and daily chart close above the mid-May high and the breached February-to-early May support line, now - because of inverse polarity - resistance line, at 12,588 to 12,605. In this case a double bottom would be formed with the 55-day simple moving average (SMA) and early May high at 13,507 to 13,554 being targeted.

The danger for the bulls is that the current minor bullish reversal will once more lose upside momentum and falter below or near the 12,588 to 12,605 resistance zone before making a new low for the year.

If last week’s low at 11,490 were to be slipped through, the 11,072 to 10,677 region would be targeted, roughly another 10% drop in the value of the Nasdaq from current levels. This support area consists of the July 2020 high, September and October 2020 lows as well as the 200-week SMA.

Slightly further down lies the 61.8% Fibonacci retracement of the 2020-to-2022 pandemic bull market at 10,480. Only a fall through this level could trigger a ‘dotcom bubble’-like crash, taking the Nasdaq 100 back to its February 2020 pre-pandemic high at 9,752, over 40% below last year’s high.