Nasdaq 100 correction on the cards
The Nasdaq 100 has been on a meteoric rally from a low in March 2009 of 1040. It rose in pretty much one straight line to a peak of 4686 in the middle of 2015 before seeing anything like a decent correction.
An initial drop of just over 15% preceded another drop of a slightly larger magnitude at the end of the year. The index then bottomed at 2862 in February 2016.
The next rally was at a much faster pace. Prices rocketed to a high this month of 5898.75. This marked a gain of 2036 points or 52% in less than 16 months.
The full eight-year gain is 4858 points, or 467%. What an incredible ride for investors as you can see in the weekly chart below. Needless to say I missed the whole move!
Of course much of the recent rally has been driven by a small number of stocks. These include the ‘FANGs’ – Facebook, Amazon, Netflix and Google.
I’ve zoomed in below on the last five-year period with two clear parallel trendlines. The upper trendline starts in April 2012. This has just been tested again for the first time since the first half of 2015.
Of course this rejection on Friday night hit the headlines. The index collapsed dramatically from 5898 to 5660, or 4%, in about four hours.
Although that sounds dramatic, it only took out gains for the past three weeks. The market managed something of a recovery after hitting a low of 5634 on Monday morning, but only managed to retrace 50% of that Friday-night-to-Monday-morning-loss.
The index has been hit again as we re-test Friday’s low of 5660. We look like we’re going to re-test Monday’s low at 5634. That Friday low at 5660 coincides with the seven-month bull trendline going back to November. You can see this in the daily chart below.
The 55-day moving average at 5631 also coincides with Monday’s low. It’s obvious therefore that a break below here signals a continuation of this correction. This would target the 23.6% Fibonacci level of 5582 combined with the May low at 5550.
It is entirely possible that this support level will trigger a bounce. The bull trend could then resume happily, but we would of course need to regain that trendline in the 5660/5670 area to re-test the all-time high at 5898.
The question then is do we double-top to signal a deeper correction?
A break below the May low at 5550 would add pressure to test the April high at 5481. This high coincides quite nicely with the 100-day moving average support.
If you look back at the weekly chart, the lower trendline of that upward-trending channel comes in at around the exact same 5480 level. The bulls will therefore need to defend this level heavily if we are to remain in a strong uptrend.
Technical Analyst & Trader
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