- The Nasdaq 100 closed below the 50-day moving average for the fourth time in six weeks, signalling a weakening bullish sentiment.
- Market-based inflationary expectations, driven by rising oil prices, may lead the Fed to be less dovish on interest rate cuts.
- A key short-term resistance to watch is 15,540.
In the past four weeks, the Nasdaq 100 has experienced volatile price movements. While it surpassed the short-term resistance of 15,135 (also the 20-day moving average), it failed to break through the medium-term resistance levels of 15,460/15,540. Last Friday, it closed below the 50-day moving average.
The hesitation in the market last week is primarily due to fears that the Fed’s upcoming meeting and the release of the “dot-plot” may indicate a longer period of higher interest rates beyond 2023.
Rising inflationary expectations may catch dovish market participants off guard
If the Fed’s guidance suggests a longer period of higher interest rates due to increased market-based inflationary expectations, it could catch the market off guard. Currently, there is a 55% chance of the Fed implementing its first interest rate cut in June 2024, according to the CME FedWatch tool.
The Nasdaq 100 is considered a “long-duration” risk asset and is vulnerable to a prolonged period of higher interest rates. The top component stocks, known as the magnificent seven mega-caps, rely on longer-term revenues, which have lower present values when discounted by higher interest rates. Therefore, holding such mega-cap stocks becomes more costly.
To justify the current high valuations of these mega-cap stocks, either earnings growth must increase or share prices must decrease. If the global demand environment remains weak or enters a recession or stagflation in 2024, it is more likely that share prices will decline, putting downward pressure on the Nasdaq 100 Index.
Medium-term momentum remains bearish
Last week’s close below the 50-day moving average of the Nasdaq 100 Index indicates a bearish momentum, as confirmed by the daily Relative Strength Index (RSI).
The daily RSI has moved lower, forming a “lower low” below a key parallel ascending support level. This suggests a potential resurgence of medium-term bearish momentum.
Price actions have broken below the 20-day moving average
Last Friday, the Nasdaq 100 Index broke below its 20-day moving average. Although there was a minor rebound on September 18, it was halted at the 20-day moving average, indicating that short-term bearish momentum is still present.
Pay attention to the key short-term resistance at 15,540. A break below 15,085 could trigger further declines towards the next support level at 14,750. Conversely, a clearance above 15,540 would invalidate the bearish sentiment and could lead to the next intermediate resistance at 15,800.
