Chart of the day: NASDAQ is losing ground

Yesterday’s U.S. stock market reversal raised an important question for investors: will we see further declines in the last trades of the week, or will the bulls come to the rescue again and buy out the drawdown? We, as traders, should be ready for any scenario and act according to the circumstances.

“Bears” seem to have the upper hand for now as futures suggest Wall Street will open in the red zone.

During Thursday trading, markets managed to fall, recover, and then fall back to the day’s lows. Investors are worried about the prospect of aggressive monetary policy tightening. Another jump in consumer inflation, reflected in the January report, gave rise to rumors about the possibility of a March increase in the key rate by 50 basis points at once; at the same time, several rounds of tightening of the monetary policy are planned for this year. The 10-year government bond yield broke through the 2.00% barrier, weighing heavily on overbought technology stocks offering low dividend yields.

Over the past few months, I have expressed optimism about the U.S. stock market on the back of an imminent Fed rate hike. In mid-December, I noted the prospects for a correction in the NASDAQ 100. Although the index took its time, it did break the trend line and eventually the 200-day moving average.

The NASDAQ has already tested the 200-period DMA twice, but the bears are not letting up. As long as this moving average acts as resistance, the bulls should be extra cautious, especially in light of the rapidly changing macroeconomic backdrop.

Yesterday’s “takeover” pattern is clearly another shot across the bullish bow, raising the probability of a breakdown of the 14,500 support level and a further sell-off. At this stage, I would not rule out a retest of the 14,000 mark in the coming days.

But let’s not get ahead of ourselves, because as traders we should be ready for any scenario. The bearish signals we have heard make the NASDAQ a candidate for a decline today. But at what point will the picture turn bullish again?

There are at least two bullish scenarios.

The first is to wait for a deeper correction and the formation of an upside signal (e.g., a “hammer”), even if it takes several weeks. An alternative buy signal could be a rapid recovery in today’s trading or in the next few days, accompanied by a breakdown of the 15,000 mark and the 200-period DMA. As a result, the “bears” will be forced to liquidate short positions and cover them, intensifying the rally.

Personally, I am leaning towards a deeper NASDAQ drawdown scenario, and therefore recommend focusing on the possibility of selling from resistance rather than buying from support levels.


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