Nasdaq 100 analysis: US stocks bounce but sentiment remains fragile

• Nasdaq 100 analysis: Short-covering likely reason behind slight recovery
• Rising real yields discourage stock market investors
• Nasdaq 100 technical analysis: 15,000 support level could break

The major US stock averages tried to stage a bit of a bounce shortly after the cash markets opened. The recovery looked like was driven by short-covering, although some would point to news that US industrial output jumped 1% in July, which was better than expected, as a reason behind the slight recovery. The industrial data comes a day after retail sales also overshot expectations. However, good data is not necessarily good news for stocks since it increases the likelihood that the Federal Reserve will keep monetary policy contractionary for longer. So, I wouldn’t be surprised if markets weakened again later in the day.

The slight recovery comes a day after US stocks were unable to hold onto the gains made on Monday, joining a global stock market rout. Sentiment has been hurt this week by weak Chinese data, rising bond yields and valuation concerns, while the lack of fresh bullish catalysts is also discouraging the bulls to buy the dip. China’s central bank cut interest rates but so far this has not helped to offer too much support.

Rising real yields discourage stock market investors

Rising real yields are continuing to discourage investors from investing into growth stocks. A surprisingly resilient US economy is helping to keep bond yields supported, making stocks which have low dividend yields less attract compared to the higher “risk free” returns from investing in government bonds.

This week’s release of stronger US retail sales and industrial production data have only helped to reinforce the view the US economy is holding its own relatively well in what should, in theory, be a challenging environment for the consumer faced with high inflation and interest rates. Fears over a hard landing have diminished, and now many analysts only expect to see the US economy experience a soft economic landing. Expectations that interest rates may have to remain high in the US for longer is what is helping to keep bond yields – and the dollar – elevated.

On top of that, this week’s mild risk-off tone hitting Chinese assets, copper and global equities is also likely to discourage investors until something changes fundamentally. Concerns about China and eurozone economies have helped to keep the euro undermined, boosting the appeal of the dollar, which is also a sign of risk off.

Nasdaq 100 technical analysis

Despite the slight bounce, the path of least resistance remains to the downside for the Nasdaq.

The Nasdaq created a hammer candle on Monday but there was no upside follow-through on Tuesday, when the markets fell across the board. Many trapped traders’ stops would now be resting below Monday’s range. With the index having failed to hold above Monday’s high, it is very likely in my view that the Nasdaq will drop to a new low on the week, and sweep those stops – possibly later on in today’s session.

In other words, key support around 15,000 could be taken out today. But since we also have the FOMC minutes later, it is worth keeping an eye on the closing levels to give you an indication of what to expect the next day.

A decisive move below this 15K support level may very well trigger follow-up technical selling in the day or days ahead, especially as there are no further obvious levels of support to watch below this level. If this were to happen, the July low at 14921 could be the next downside target, followed by the next low at 14688.

Conversely, if we see a recovery then this will boost the Nasdaq’s appeal in the short-term outlook.

But overall, the risks do appear to be skewed to the downside from here. However, the bears must be careful not to chase the markets lower too aggressively given the fact that the longer-term trend is still technically bullish with the 200-day average pointing higher.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R