Nasdaq 100 forecast: Markets remain vulnerable despite BoJ pushback

After starting the day well in the green, the major US indices were coming under a bit of pressure again at the time of writing, with investors unable to shake off the recent turmoil impacting financial markets. For now, the Nasdaq 100 forecast remains mildly bearish after the recent breakdown. More evidence of a bottom is needed to excite the bulls again even if there is a sense of calmness observed in price action over the past two days or so.

Stocks stage relief rally but remain vulnerable

It has all been about Japan and its central bank dominating the headlines and markets over the past week or so. On Wednesday, global indices staged a relief bounce, following on from a big recovery in Japanese stocks after a top BoJ official pushed back on the central bank’s hawkish stance from last week. Also supporting risk appetite slightly was the lack of any major bearish news and a quiet economic calendar. For the same reason, investors were not in a hurry to buy the dip. They were trying to make a more sober assessment of the events over the past week or so, figuring out which segments of the markets would be least impacted by the carry trade unwind and whether to re-open their trades in light of the BoJ’s pushback. Some were wondering whether there was an overreaction to the BoJ’s larger than expected policy tightening last week. Overall, sentiment remained cagey, and more evidence was needed to suggest the worst of the selling is over. Not many people were confident to buy this latest dip, especially with US CPI looming next week. Trades were also awaiting a clear bullish reversal signal on the indices to confirm the market has formed at least a temporary low.

BoJ re-assurance triggers relief

The Bank of Japan’s Deputy Governor Shinichi Uchida gave investors a big reason to at least slow the unwinding of carry trades, if not put them back on. This helped to ease pressure on the global markets, and we saw major indices rebound strongly, led by Japan. Uchida said that the central bank “won’t raise rates when markets are unstable” and that Japan’s monetary “policy path will obviously change if market volatility view on risks change.”

The reassurance from the BoJ followed wild swings across financial markets over the past week. Benchmark stock indexes plunged before bouncing back, although not quite to the same levels they were trading pre-BoJ meeting. This volatility was intensified by expectations of more aggressive rate cuts by the Federal Reserve, owing to weakness in US data. This has triggered a sharp unwinding of the popular yen-funded carry trades. A lot of these trades involved buying of US tech stocks, which is why the Nasdaq has been particularly hit hard.

Nasdaq 100 forecast: Technical analysis

Source: TradingView.com

The prior bullish technical Nasdaq 100 forecast became invalided with the major US indices breaking below key support levels in recent days. This recovery from short-term oversold levels should therefore be treated with extra caution as it could prove to be a bull trap this time. Indeed, the Nasdaq was testing a key broken technical area between 18,335 to 18,585 (area shaded in orange on the chart), a region which had previously provided support for the market. Now that we are below it, some trapped bullish traders would undoubtedly be using the opportunity to exit their trades, while the bears might be looking for shorting opportunities. That being said, the Nasdaq 100 has not broken below its 200-day average on a closing basis yet despite an intraday plunge beneath it on Monday, implying that the long-term bullish trend is still intact despite the sharp selling recently. This should also keep the bears on their toes, especially amid a lack of any further bearish news or market events. So, watch for support to potentially hold around the 17,800-18,000 area (green shading on the chart), where the 200-day MA meets prior support and resistance. A daily close below this range, however, could expose the Nasdaq for a deeper correction.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R