Nasdaq 100 Soars as Tech Shares Make Comeback. Is This Another Dead Cat Bounce?

[ArvinIG]

US STOCKS OUTLOOK:

• S&P 500, Nasdaq 100 and Dow Jones post solid gains on Tuesday
• Strong April U.S. retail sales data helps improve market sentiment and morale
• This article looks at the key technical levels to watch for in the Nasdaq 100 over the coming days

 

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After a subdued performanceat the start of the week, U.S. stocks rallied on Tuesday, buoyed by improved investor morale, on hopes that the worst is over in terms of the recent sell-off and that risk assets will begin to stabilize in the near term.

At the closing bell, the S&P 500 jumped 2.02% to 4,088, its best level in almost three weeks. The Dow, for its part, rose for the third day in a row, climbing 1.34% to 32,654, boosted by strong performances by Goldman Sachs, Home Depot and Boeing shares. Meanwhile, the Nasdaq 100 led the charge higher on Wall Street, soaring 2.62% to 12,564 on account of broad-based tech sector strength.

Although stocks were already advancing in the pre-market session, gains accelerated after April U.S. retail sales data showed that American consumers kept their wallets open and maintained robust consumption despite rising inflation and falling real income. The solid numbers suggest that household spending, the main driver of economic growth in the country, remains resilient and can continue to support the expansion over the medium term, a good sign for second-quarter GDP and possibly beyond.

In the afternoon, Fed Chair Powell’s comments on the central bank's tightening cycle and his strong resolve to restore price stability sparked volatility and briefly weakened the rally, but the reaction was temporary and ultimately reversed. After all the twists and turns, the three major equity benchmarks ended the session near their daily highs.

Looking ahead, the economic calendar is thin for the rest of the week, so sentiment will likely dictate direction. That said, Tuesday’s upswing is welcome, but it doesn't change the fact that stocks are still down a lot so far this year and that the near-term trend remains negative in terms of technical analysis.

In any case, to further improve sentiment and confirm that this is not another dead cat bounce, we would need to see a follow-through to the topside in the coming days. That will tell us that there is more confidence in the market and in the belief that the Fed will be able to engineer a soft landing of the economy.

Focusing on the Nasdaq 100, despite the recent rebound, the tech index remains in bear market, down more than 25% from its November 2021 peak. For buying momentum to accelerate under current conditions, price must overcome the next critical resistance at 12,645. If we see a clear break above this barrier, the focus shifts up to the psychological 13,000 level, followed by 13,605, the 38.2% Fibonacci retracement of the 2021/2022 selloff.

On the flip side, if sellers return to fade the rip and price turns lower, support lies at 12,200. If this floor is breached, a retest of the 2022 lows cannot be ruled out.

NASDAQ 100 TECHNICAL CHART

Nasdaq 100 Chart Prepared Using TradingView

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DISCLOSURE

Diego Colman, Market Analyst, Daily FX
May 18, 2022