The Nasdaq sold off sharply
last week driven primarily by AI-related and technology stocks. Concerns about
the profitability of massive AI investments, disappointing corporate earnings
and rising financing costs triggered a sharp rotation away from Big Tech.
Investors started to
question whether the enormous amounts being invested in AI infrastructure will
generate sufficient returns to justify the expenditure.
Keep in mind that AI
investment became a significant contributor to US economic growth, so a
prolonged reduction in spending could negatively affect the broader economy.
The selloff, though,
started weeks ago as macro and geopolitical headwinds intensified. The higher-than-expected
inflation data raised concerns about a more extended tightening cycle, while renewed
US-Iran tensions weighed on growth expectations as oil prices surged. This came
at a time of overcrowded positioning.
Looking ahead, the focus
will be on US-Iran negotiations and the US midterm elections. The risk
sentiment improved a bit after Iran proposed over the weekend a two-day
framework to reopen the Strait of Hormuz in exchange for US concessions,
including sanctions relief, the release of frozen assets and lift of the
blockade.
This is a shorter timeline
that the seven-day framework proposed a month ago. The markets interpreted the
shortened timeline as a positive development, although the US has not accepted
the proposal yet and negotiations continue. A breakthrough will likely trigger
a strong rally on improved growth expectations and lower rate hike bets. Setbacks,
on the other hand, could weigh further on the Nasdaq.
On the US midterm side, I
think a Democratic House is already priced in, but a blue sweep could put
additional pressure on the stock market on stronger fiscal restraint
expectations if it’s not coupled with a US-Iran breakthrough. A surprising red sweep, on the other hand, may be positive as
markets could reprice the expected fiscal restraint.
NASDAQ TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On
the daily chart, we can see the Nasdaq (US100 CFD contract) broke below the key 28,800 support zone. This has
opened the door for a drop into the 26,971 level next. We can expect the sellers
to step in around the broken support, with a defined risk above it, to keep
pushing into new lows. The buyers, on the other hand, will want to see the
price breaking higher to pile in for a pullback into the downward trendline.
NASDAQ TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On
the 4 hour chart, there’s not much
we can glean from this timeframe as the sellers will likely step in around the
broken support, while the buyers will need a break to extend the pullback into
the downward trendline. If the price gets to the trendline, we can expect the sellers
to lean on it, with a defined risk above it, to position for a drop into new
lows. The buyers, on the other hand, will look for a break to increase the
bullish bets into new record highs.
NASDAQ TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add here as the sellers will have a better risk to reward setup
around the broken support, while the buyers will need the price to rise back
above that zone to open the door for new highs. The red lines define average daily range for today.
UPCOMING CATALYSTS
Todaywe have
the US ISM Manufacturing PMI. Tomorrow, we have the US Job Openings data and
the US midterm elections. On Wednesday, we have the US ADP and the US ISM
Services PMI. On Thursday, we get the latest US Jobless Claims data. On Friday,
we conclude the week with the US NFP report and the University of Michigan
Consumer sentiment survey.
This article was written by Giuseppe Dellamotta at investinglive.com.