Nasdaq 100 Breaks the Post-Election Channel, Goes Oversold

2022年1月21日

There's a bullish channel in the Nasdaq that started around the 2020 Presidential election and held the lows all the way into 2022 trade.

This week saw that channel shredded through as NQ quickly went into an oversold state on the Daily chart. This is only the 2nd such instance of that signal since the pandemic almost two years ago, and the last one of these showed up in October just before a major ramp of 16.7% that set the current ATH.

At this point, however, it's pretty clear what's doing the driving and that's the fear of an aggressive shift from the FOMC. When the bank said a possible 2-3 hikes at the December rate decision, stocks held support and the S&P 500 even went on to set another fresh ATH. What has become more of a restraint, however, is the continued run in rates markets that are now expecting four hikes out of the Fed this year. There's even some potential for as many as 5-6 hikes, and this is for a Fed that's been generally passive while holding loose monetary policy for much of the past decade.

I think it's unlikely that the Fed tanks the stock market next week. Instead, I expect Powell to trot out a somewhat hawkish message, warning of hikes in March while remaining fairly dovish about it, just like he did in December. This can be accomplished by avoiding the topic of Quantitative Tightening which many are starting to fear as a prospect given the continued stickiness with inflation.

As far as levels are concerned - I don't think that the low is in place yet. There's a lot of fear as many have already started rushing for the exits. The 6-month low rests at 14,375, which is also the 23.6% Fibonacci retracement of the two year major move. But this seems to be almost too clean for that low. I'd like to see that level first traded through to wash out any stops that might be sitting underneath. The 14k level just below also retains some interest for possible support. If price can then pose some element of recovery, I want to base that potential support off of whichever level, 14.4 or 14 that can start to stem the bleeding, but only after its traded through first. This can allow for a reversal setup around FOMC on Wednesday.

It's very easy to be bearish right now, especially after such an extended run. But - selling at such levels is difficult given how shallow any bounces have been. And when much of the market starts looking in one direction, it's time to start going in the other.