From Safehaven
The NASDAQ 100 has been crashing since May 8th, but has anybody noticed? Since the NDX topped at 1,721 on May 8th, three days before our last Hindenburg Omen, the NASDAQ 100 has crashed 15.94 percent. It is down nearly 18 percent since its January 11th top, and is down 12 percent for the year.
The author goes into a fair amount of Elliott Wave Analysis, which is important but not what I will focus on right now. First, take a look at this chart:
This is a weekly chart of the QQQQs, which is the tracking stock for the NASDAQ 100.
First, NASDAQ is largely a proxy for technology. The latest stock market rally has essentially occurred in commodities and industrials. Technology has languished. So the NASDAQ is out-of-favor with traders who have moved a fair amount of money into the futures markets.
Notice how the markets literally drop from 42 in April to the current level of 36. That's a drop of 14%. Traders consider 10% a standard amount for a "regular" market correction, give or take a few percentage points. So, we are still above the "standard" amount of a correction.
Now, look to the left part of the chart from 2005. Notice the price levels around 40.5, 38 and just below 37? Traders have an adage: "markets have memories". This means that a high or low price the market previously achieved creates an important point for the market. A later move above or below that price is "technically significant". Traders will draw a horizontal line from a particular point all the way across the chart, creating "resistance" and "support" lines. A "support" line is below the current price and a "resistance" line is above the current price.
What's important is the QQQQs closed below two important support lines located around 40.5 and 38. This indicates a possible change in market psychology, moving from bullish to bearish.
In addition, notice the two long red lines in the sell-off. These indicate very bearish sentiment among traders. During an entire week traders were selling like there was literally no tomorrow.
Let's pull the image back and look at a longer time frame:
Notice that in the last few years, NASDAQ has sold off twice -- in July 2004 and Early 2005. Both sell-offs were of a similar magnitude. The main difference between the latest sell-off and the earlier sell-offs is the Fed. The Federal Reserve has increased interest rates for the last year and a half. The NASDAQ may simply be the first market to sell-off due to the economy cooling from the rate hikes.
Finally, note the two technical indicators above and below the chart. Both are in technically oversold areas, implying a rally is likely. However, the overarching economic environment does not bode well for such a rally. GDP growth slowed in Q2, inflation increased and the Fed is increasing interest rates.
So - what does all of this mean? Simply put, NASDAQ is in really poor shape technically. Traders are literally running from technology. As noted above, tech is still suffering from a bit of a post 1990s hangover. But it also indicates serious concern exists about NASDAQ. In other words, traders are deeply concerned about an entire area of the economy - concerned enough to avoid investing there. That should concern everybody.