Nasdaq – Nearing correction territory

More downside to come?

It’s been another rough day for the Nasdaq, with the index sliding more than 2% and leading the way lower in the US.

As central banks prepare to pull back on pandemic stimulus measures, investors are starting to get nervous and it seems big tech is viewed as being most sensitive to it.

It doesn’t help that central banks are doing this at a time when the global recovery is slowing and many countries are going into an uncertain winter, with Covid rates likely to spike and an energy crisis underway.

Inflation is clearly the key driver, despite their insistence that it is temporary, and an energy crisis and soaring oil prices are only going to further fuel that.

The Nasdaq has already fallen around 8% from its highs and is not far off correction territory (10%). So how much further will it fall?

Interestingly, that 10% mark falls around the 200/233-day SMA band, with a move below here tipping the index into bearish territory (not a bear market which is a fall of 20%). This could be a very significant move, if it happens.

This makes 14,000 a very big level for the Nasdaq (10% from the highs would be a little over 14,100, so this entire area will be key). I imagine we may see support arriving at this point.

A look at the momentum indicators on the 4-hour chart suggests we’re already seeing the index running a little low, with the last two price lows coinciding with higher lows on the stochastic and MACD, creating a divergence.

While this isn’t a bullish signal in itself, it does suggest the sell-off is losing momentum on approach to a major support level, which may indicate that support is coming.

A rotation doesn’t necessarily mean the sell-off is over. But we may learn a bit more about the strength of it by the reaction we see in the charts when support does arrive.

There is still much to be concerned about with the economy and markets in the coming months. But is it enough to stop investors just buying another dip? And a generous one at that. We’ll see.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.