No big Nasdaq nasties for now
From a technical perspective, the Nasdaq 100 shows little sign of ending its decade-long uptrend anytime soon.
The U.S. stock market is on course for a near unbroken 10-year streak of annual gains. Whilst this rally of historic length has lifted all boats, seasoned participants are aware that it hasn’t lifted all boats equally. Over the past decade, both the broader Nasdaq Composite and its more compact and technology stock-centred cousin, the Nasdaq 100, have outperformed other key U.S. stock gauges. There’s no mystery for the disparity. Years of triple-digit percentage gains by shares in global online groups have powered Nasdaq indices higher.
A challenging year
Relatively narrow consistent participation in market leadership has its downsides of course. For one, when things are on the other foot for technology leaders, nerves rise in the broad market, and for good reason. For instance, amid global concerns about privacy, we’ve seen higher official scrutiny and tightening regulation over the practices of Facebook, Google, Twitter, Amazon and others. Along with the volatile sentiment accompanying many of their business models, new external challenges, some specific (regulatory headwinds) others global (trade/tariffs) have made share price progress of dominant technology companies more halting this year. This is reflected in Nasdaq indices.
Tariffs pressure Big Tech
Returns by the most-watched Nasdaq market, Nasdaq 100, are unsurpassed this year. It tacked on 17.64% by 29th August. A key investor worry then, is that Washington’s dispute with China combined with increasing regulation could create bigger obstacles for the web, streaming, e-commerce and software giants that are dependent on global consumption and dominate Nasdaq 100. Such worries came to a head (again) on Monday amid signs that the White House could impose the latest round of tariffs on China at almost any moment.
As ever, the long-term technical perspective on the index is only instructive to a point. However, it does suggest that so far, investor anxieties should be seen as contained. This is largely due to a widely accepted standard that technical analysts use for gauging the depth of retracements, or reversals. It is based on Fibonacci intervals, a topic that can be confusing for new chart watchers. Fortunately, all that needs to be understood is that key retracements are normative (meaning within the standard) if they’re no deeper than the 78.6% Fibonacci interval. In practice, most should be around 38.2% or, in a deeper downswing, near 61.8%. We apply these ideas to the market at hand in the chart below. We see that since July 2016, the Nasdaq has traded along a high-quality rising trend line. In itself, that’s a reassuring pattern for buyers.
Technical analysis chart: Nasdaq 100 – weekly intervals
Source: Thomson Reuters/City Index
In context of that trend line, each retracement of the clearest prior up leg has indeed mostly been no sharper than 61.8%. In one case, in April, a retracement extended somewhat past the 78.6% Fibonacci, but the market swiftly ‘recovered’, in the sense that it quickly returned above the trend line and continued to rise. The Nasdaq’s current challenge comes as the market is on edge awaiting the latest U.S. tariffs on China. Weakened sentiment has seen the index falling toward a 38.2% Fibonacci (equating to about 7408 on the index). There’s no way of telling what prices will do from here using Fibonacci level alone. Furthermore, it’s worth remembering that relying exclusively on one chart technique alone for trading decisions is unwise. However, we can say that so far, rising trend line support offers decent prospects of a continued general upward trajectory for the Nasdaq 100. Relatively shallow Fibonacci intervals between the start of 2016 to date back that good probability. This will remain the case till retracements get much deeper and/or the rising trend line is definitively broken. This week could bring tensions that stoke further volatility for all stock markets, including the Nasdaq (again how much and when are difficult to predict from charts). But underlying Nasdaq 100 sentiment is likely to remain robust whilst its long-term trend and retracement patterns continue.