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Nasdaq technical analysis | Nasdaq up over 40% YTD

BY Janne Muta

|September 1, 2023

Nasdaq technical analysis – Nasdaq has rallied an impressive 41% YTD with stocks like Nvidia (+233%), Meta (+141%) and TSLA (+120%) leading the way. As technology and artificial intelligence especially are likely to play an ever-increasing role in the economies some have even estimated that Nasdaq could one day surpass the Dow Jones Industrial Average in point value.

That remains to be seen. As price action oriented technical traders, we don’t have to rely on projections of what a particular market could do in the future. Instead, we follow the price action and trade our edge when we see it present in the markets. Otherwise, we stay in cash and wait.

This is where Nasdaq technical analysis, our focus today, is invaluable. As the price action unfolding day to day and hour by hour basis is the true opinion of the market participants collectively, we should focus our attention on understanding the nuances when the market expresses its opinion via price action.

While fundamental drivers push the Nasdaq in a certain direction it’s the Nasdaq technical analysis that helps us to time the moves. Let’s take a closer look.

Today’s main risk event impacting Nasdaq and pretty much every other market is the US employment and earnings data releases. We hope that this report will help our readers in creating a game plan for today’s trading in an environment that’s probably going to be more volatile than normal.

Nasdaq technical analysis

Nasdaq technical analysis weekly chart

Nasdaq technical analysis weekly

Two weeks ago, Nasdaq resumed the uptrend after attracting buyers at the 23.6% Fibonacci retracement level. This level coincides roughly with the SMA (20). The bounce created a higher low in the market and has encouraged the bulls to keep pushing the market higher.

The current weekly candle, should it close near the current levels, is going to be a momentum candle. Such candles typically indicate higher prices but as always, the price action following the indication needs to confirm it.

The Stochastic Oscillator is bouncing higher from oversold condition giving a buy signal on Nasdaq. If this momentum carries on after the NFP and earnings numbers are out, we should look for a move to the 15 931 high, and perhaps even further.

Should the momentum fail and market sell off it could trade down to the nearest technical confluence area (14 553 – 14 620). Nasdaq technical analysis in a classic sense indicates that the market stays bullish above this confluence area. If the area fails to support the market the recent uptrend is no longer in force and the market might trade significantly lower.

Nasdaq technical analysis daily chart

Nasdaq technical analysis daily

Nasdaq technical analysis in the daily timeframe chart shows the market trading at a confluence level created by a minor resistance level (15 526) and the bull channel top. Yesterday’s candle has a relatively narrow body and a longish wick above the candle body.

This signals momentum loss and confirms the validity of the confluence area we’ve identified. The nearest support level isn’t far though. The level that supported the market on July 24th and then acted as a resistance sending the market lower on August 24th (15 366) is only some 0.8% away from the current market price.

If today’s NFP and earnings data is strongly inflationary (higher than expected employment numbers and healthy earnings) we could see the market trading through this level approximately to 15 120 and then if weakness continues possibly towards the lower end of the bullish price channel (currently at 14 900).

Analysts however are expecting lower jobs and earnings numbers though. Now the question is: Are these numbers already priced in and do we need to see even lower figures to continue the rally? This is a question we can answer only after we see how the market reaction unfolds after the data release.

Nasdaq technical analysis 4h chart

Nasdaq technical analysis 4h

Once again, it’s the Nasdaq technical analysis on the 4h chart that helps us to see a more detailed picture of the recent price action. The two shooting stars, or exhaustion candles as they are often called show how upside momentum started to fail when the price hit the confluence area (resistance + channel top).

This timeframe reveals a technical confluence area near the August 24th reactionary high. The SMA (20) the aforementioned high and the 23.6% Fibonacci retracement level coincide at the level. Should the confluence area fail to provide support to Nasdaq the next confluence level is roughly at 15 158 (the 50% retracement level and the SMA (50). Above yesterday’s high (15 574), if the breakout is strong, look for a move to 15 670.

Client sentiment graph

Client sentiment analysis

TIOmarkets clients are relatively evenly divided between longs and shorts in Nasdaq with 57% of them favouring the short side and 43% the long side. Therefore, the retail trader sentiment doesn't provide a strong indication on this market.

It’s good to remember that the retail trader client sentiment is a contrarian indicator as most of the retail traders are on average betting against the market trends. This is why, experienced traders tend to trade against the retail client sentiment. You can follow the TIOmarkets client sentiment live on our Forex dashboard.

Nasdaq fundamental analysis

Nasdaq is a perfect market to follow on a day when interest rate sensitive employment and earnings data are released as Nasdaq is quite sensitive to the cost of money (interest rates). If the NFP and especially earnings data is believed to increase inflation expectations and the likelihood of the Fed hiking the rates or keeping the rates higher for longer, then we should see pressure on Nasdaq.

Nasdaq stocks are sensitive to interest rates because they are typically growth stocks. Growth stocks are companies that are expected to grow their earnings at a faster rate than the overall market. They often invest heavily in research and development, and they may need to borrow money to finance their growth.

When interest rates rise, it becomes more expensive for growth stocks to borrow money. This can lead to lower earnings growth, which can in turn cause the stock price to decline.

This is why Nasdaq stocks are often priced for future growth. Investors are willing to pay a premium for Nasdaq stocks because they expect them to grow their earnings at a faster rate than the overall market. However, when interest rates rise, the present value of future earnings decreases. This can lead to lower stock prices.

When interest rates rise, the discount rate used in free cash flow valuation analysis also rises, which lowers the present value of the company. Additionally, higher interest rates can make it more expensive for companies to borrow money, which can reduce their ability to generate free cash flows and lead to lower valuations.

Non-farm payrolls preview

While the analyst consensus expects to see 169K new jobs created (187K prior) today’s release could see a downward deviation from analyst consensus expectations, as historical trends and seasonality this in the month of August. The consensus forecasts point towards a decline in both job numbers and average hourly earnings m/m. Interestingly though, historical data reveals that August's labour market reports have missed expectations on the downside 77% of the time over the past 22 years, highlighting the historical challenges associated with this month. Average Hourly Earnings m/m is also expected to come in below the previous number (0.3% expected vs. 0.4% prior).

Two Scenarios Unfold: Implications for Yields and Nasdaq Index

Against this backdrop, two distinct scenarios could potentially unfold, each with implications for financial markets:

Scenario 1: Numbers Surpass Expectations

Should today’s earnings and employment figures exceed market expectations, the outcome could fuel higher yields and elevated expectations of Federal Reserve rate hikes. This scenario might subsequently pressure the Nasdaq index.

An upbeat report on jobs and earnings would be likely to increase optimism about economic growth and thus give a boost to inflation expectations. Consequently, bond yields could rise as markets adjust to the prospect of higher interest rates by the Federal Reserve.

The implications for equities, particularly for technology-oriented stocks that are sensitive to borrowing costs, could result in downward pressure on equity valuations. The Nasdaq index, composed primarily of such technology stocks, might be particularly vulnerable to this development.

Understanding the broader economic landscape through fundamentals and the scenarios that might emerge, but at the end of the day it’s Nasdaq technical analysis that can capture market sentiment that may not yet be reflected in economic data.

Scenario 2: Numbers Disappoint, Leading to Dovish Expectations

In contrast, if the employment and earnings data fall short of consensus forecasts, a scenario might emerge where the Federal Reserve is expected to cut rates next year, with no rate hikes projected for the remainder of this year.

This scenario could result in downward pressure on yields, reflecting market perceptions of a more accommodative monetary policy in the foreseeable future.

This could provide support to the Nasdaq index. Lowered expectations of imminent rate increases might enhance the appeal of future cash flows for growth-oriented companies. With reduced borrowing costs, investors might view tech and growth stocks more favourably, potentially bolstering the Nasdaq.

Conclusion

Amidst these potential scenarios, the broader economic landscape contributes further complexity to Fed decision-making. The Core Personal Consumption Expenditures (PCE) index's annual rate, rising to 4.2% in July 2023, underscores persistent inflationary pressures surpassing the Federal Reserve's 2% target.

At the same time, the Q2 2023 GDP growth at 2.1% indicates a modest but lower than expected rate of expansion suggesting inflationary pressures could be easing.

The moderation in personal income growth and wage growth in July further supports the narrative about cooling inflation and resulted in the futures traders changing their views on the Fed policy. No rate hikes are expected for this year anymore and the first rate cut is projected to take place in May next year.

The insights gained from this report, we hope can form the basis for more advanced Nasdaq technical analysis, aiding our readers in identifying key technical factors impacting the market.

While expectations about the policies of the data driven Federal Reserve impact the overall market sentiment, Nasdaq technical analysis can pinpoint more immediate trading opportunities as the price action unfolds. In both scenarios, bullish and bearish, traders have the ultimate power to decide when to accept market exposure.

This is a power the majority of institutional fund managers don’t have. Therefore, it’s advisable to use this power and only take trades when the market presents a well research opportunity with an edge.

For more analysis on the US economy, visit our recent reports on EURUSD and S&P 500.

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The next main risk events

  • CAD - GDP
  • USD - Average Hourly Earnings
  • USD - Non-Farm Employment Change
  • USD - Unemployment Rate
  • USD - ISM Manufacturing PMI
  • USD - ISM Manufacturing Prices

For more information and details see the TIOmarkets economic calendar.


While research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.

DISCLAIMER: Tio Markets offers an exclusively execution-only service. The views expressed are for information purposes only. None of the content provided constitutes any form of investment advice. The comments are made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances, or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval.

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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