Nasdaq Analysis (24, April, 2020)

Nasdaq-100 (Analysis 24, April, 2020)

 

It has been a while since my last analysis of Nasdaq-100, i think that now is the time to give an update on what happened and what could come next because we are at a very important point of evolution of the recent events.

Nasdaq-100, medium term view

In my previous analysis I noted that the Nasdaq was ready for a meaningful pool back or correction (link: SP500 and Nasdaq100 (19.01.2020))

At the time the news of the Corona Virus from China was unclear and no one could have suspected that it would turn in a global pandemic phenomenon just a couple of months later.

We had a very sharp collapse of the Nasdaq, with a record value on the volatility index (VIX) of about 86, and a very high value on the VVIX of nearly 210.

Figure 1 shows the Nasdaq-100 on the weekly chart.

Figure 1: Nasdaq weekly chart (from eToro)

We can observe that the RSI value moved extremely quickly from a situation of over-bought (the highest in over a decade) to the lowest in a decade, about 27.
The point of strong over-sold corresponded with the temporary bottom just above 6600$ (the support level marked as C).

It then began a very sharp recovery all the way to the current levels around 8800$, a very sharp and significant move upward from just a month ago.

The sharp collapse of the index was due to the combined effects of two events that basically threw the global economy into recession territory in a matter of weeks.

1) the realization that the global economy was going into a suspended state for a while in order to limit the speed of the spread of the Corona Virus, due to the fact that we failed to contain it and we allowed it to become a full pandemic.

2) the collapse of the oil prices due the the price war that Saudi Arabia began against Russia, which produced a never seen before event: the risk that the world will run out of places where to store the produced oil, thus the occurrence of negative prices for oil that has never seen before.

What moved the markets back up so quickly?

The central banks actions (in particular the FED for what's concerning the Nasdaq) and the Governments acting very quickly to support their own economies with interventions of historical proporsions and new support packages ready to come soon. This was a necessary action in the attempt to keep businesses alive until the imposed "suspended state" of the economy is lifted.

The recovery of the Nasdaq-100 has been very sharp. My personal opinion is that it was a bit too fast and the market acted too quickly not really knowing how the future in terms of the next months and year actually looks like.

I would say that currently the markets are "priced for perfection".

This means that we are likely to at least revisit some of levels indicated from the green support lines as soon as any major event that deviates from "perfection" were to occur.

In particular the supports in the "B-zone" (Figure 1) and possibly even lower have a high probability to become the consolidation range for the markets for some months or even many months.

Many experts believe that we will not revisit the temporary bottom printed on March, i guess that this will depend strongly from how quickly the lock-downs can be lifted from the Governments and if there were to be a new infection spread.

If a vaccine or an effective drug that limited the worst symptoms of the virus were to be found and released that would probably decide where the market bottom will be found.

In the conclusion section I will give you my take on how to decide that it became safe to invest again in the stock market.

Nasdaq-100, shorter term view

In Figure 2, I indicated what I consider a pivotal support/resistance level.

Figure 2: Nasdaq daily chart (eToro)

The marked green line indicate a value that I believe has a short term strong importance, the level around 8300$.

As long as the index doesn't break below such pivotal level, it is possible to assume that the index is in a consolidation phase and there is the possibility that will move higher after such period is concluded in a not too long time.

If this support level is broken and the index moves below, I would expect that it might fall as low as the 7400$ support level and the marked level of 8300$ will become the resistance level that the Nasdaq must break through before completing a consolidation phase between 7400 and 8300$.

If bad news were to come such as the lock down must be endured for longer than anticipated or the consumers don't come back to spend in the way the market is hoping, there is the strong possibility to revisit the March lows of 6400$ or break even lower to a 6000$ level.
After that a long consolidation phase would begin marking a recession phase that might last up to a full year before recovering to the all time highs we have seen on February.

Market Sentiment

According to a survey at Sentiment Survey, a lower than average amount of traders participating to the survey was bullish. Only 24.9% of the surveyed traders was bullish instead of the average 38%, while 50% were bearish instead of the typical 30.5%.
This is actually a positive news, as the market sentiment turned bearish, this means a large part of the re-pricing is probably already on process but it doesn't feel like the markets are at the capitulation level I would like to see before calling the all clear for investors.

The COT on the Nasdaq doesn't indicate capitulation level either, with the last value marked by positive net speculation positioning of 8700 contracts.

Conclusions

The current state of the affairs with such high levels of uncertainty suggests that the current market is a very dangerous place to invest into in the short term and there is a high risk to "burn your fingers".

I would suggest to take small positions at some of the indicated support levels and trade them daily until some conditions are met that can help us to determine that the final bottom as been printed.

In general signs of true market capitulation are a very important indicator.
Further dropping of market sentiment would be a useful sign that the market fell low enough and the reward-risk ratio shifted clearly in favor of long positioning.

What to look for:

1) the VIX falls below the level of 31, possibly below the level of 25. This would be a strong signal that most of the market uncertainty have been resolved and it is time to begin gradually increasing investment positions.


2) a vaccine or an effective drug against COVID-19 was found and the lock down situations have been lifted. This would definitely mark the end of the recession.

Once the bottom was confirmed in a way or another, I would expect the markets to pushed higher from there thanks to a easy monetary situation with rate to zero or below zero basically on every major economy.


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The graphs and prices shown in this analysis were taken using as a source www.etoro.com, the platform I am using for my trading as DanieleTrader.
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Disclaimer

The content published in this blog represents my personal view.

It is intended for information and educational purposes only and should not be considered investment advice or an investment recommendation.
The reader is solely responsible for his/her investment choices.