- Nasdaq 100’s bounce faces scrutiny—will the tech rally continue?
- A break above 19,700 could signal further bullish momentum.
- The lack of strong bullish catalysts means the index's follow-through could be fragile.
- For less than $9 a month, InvestingPro's Fair Value tool helps you find which stocks to hold and which to dump at the click of a button.
Today, traders will be wondering whether we may see any significant follow-through after Wednesday’s impressive tech-fuelled bounce.
While there has been some upside-follow through, any signs of loss of momentum could put the bulls in a spot of bother again. After all, there are not many obvious bullish catalysts out there.
Why did the markets rally and can the recovery hold?
The major indices recovered significantly from the initial dip following the Consumer Price Index (CPI) data release, which was more or less in line with the expectations, albeit core CPI was a touch hotter.
Some market participants attributed those gains to Kamala Harris' performance in the presidential debate the night before, which is likely to have aided sentiment.
Short-covering was likely another reason as the positively correlating USD/JPY bounced back ahead of the key 140.00 handle, as traders priced out an outsized rate cut by the Fed.
But with the Bank of Japan turning hawkish at the time the US is about to cut rates, this is likely to keep the pressure on the USD/JPY, potentially triggering a fresh wave of the unwinding of carry trades.
So, despite the big rally we saw on Wednesday, stocks may not be out of the woods just yet. Indeed, September is historically a tough month for stock markets, and this year may be no exception.
What’s more, there are limited bullish catalysts to keep driving the markets higher. Concerns about a weakening global economy have already weighed heavily on commodities like crude oil and copper, as well as the Chinese equity markets.
Additionally, the looming US presidential elections add another layer of risk, making investors hesitant to engage in market rallies.
So, while the major US stock indices like the Nasdaq and S&P 500 are still above their long-term support levels, they do face a potential stall in momentum.
Without strong bullish catalysts, the market’s upside may be limited as the month progresses, owing to broader economic concerns and given the fact that many technology stocks are still trading at high valuations.
So, a market correction remains a distinct possibility in the near future.
Nasdaq 100: Technical Outlook and Trade Strategies
How should bullish traders proceed now?
It is all about follow-through now, something which has been lacking on the back of any sizeable recoveries ever since the Nasdaq 100 topped in July. The series of lower highs must not be ignored, as they suggest we could potentially be inside a larger bearish trend now.
With that in mind, bullish traders need to see a higher high and a clean break of the short-term bearish trend line established in July for confirmation. Without this confirmation, taking it from one level to the next is the way to go. If in the coming days, we see the Nasdaq break back above 19,700, then that would be a clear bullish signal.
What about the bears?
Meanwhile for the bears, well any signs to point to another bullish trap is what they will be looking for now. For example, if the Nasdaq futures fails to hold above Wednesday’s high, we could see a potential drop back down to the next support seen around 18970 or even 18800.
A significant bearish signal would be provided should the Nasdaq go on to fall all the way below Wednesday’s low. If that were to happen in the next few days, it would point to a complete failure on the bull’s part, which could then potentially pave the way for significant downside follow-through.
As a result, we could see the index plunge below the 200-day average and head down to 17,900 support or even towards the August lows again. But we will cross that bridge if and when we get there. First thing is first, the bears will need to push the index back below Wednesday’s low of 18547 to create such a big reversal.
Whether you are a bull or a bear, given the current market environment, focusing on risk management is always essential, especially at times like now. The combination of election uncertainty, economic weakness, and mixed inflation signals suggests that volatility could remain elevated in the coming weeks. Therefore, traders may wish to remain nimble.
Bottom line
As we move deeper into 2024, the stock market faces a mix of challenges, including economic uncertainty, geopolitical risks, and the upcoming US elections. While the Nasdaq 100 remains above key support levels, the lack of strong bullish catalysts means the recovery could be fragile.
Employment data and the Federal Reserve's next moves will be crucial in shaping market sentiment. Investors should remain cautious, as the combination of high valuations and potential recession risks could lead to increased volatility and possible market corrections.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.