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Nasdaq outlook: where now as index turns positive for the year?

Having now moved out of negative territory for the year, can the tech index sustain further gains?

Nasdaq Source: Bloomberg

While the Nasdaq 100 has not recovered all the losses since February, it is once again positive for the year, if only just. From the March lows we have seen one of the most impressive months for the tech index. But as the bounce stalls, will the slowing economy finally take its toll on the index?

Nasdaq rally has started from price perspective

From a price perspective, the rally has stalled. Having broken through trendline resistance in late March in its push higher, the index then rallied to 9000, holding rising trendline support from the 19 March lows. This however was broken in the second half (H2) of April, with the price dropping back towards 8500. A rebound from this level did not change the general outlook, faltering below 9000 and failing to get back above the rising trendline.

Nasdaq daily chart

A more bearish view would require the price to drop below the late April higher low of 8500 – this would the clear the way for further declines, potentially towards 7400 and the higher low from late March/early April.

Alternatively, the current price action may be just a consolidation after the big up move, in which case a push above 9000 will revive the bullish move and potentially bring the February record high at 9750 into view.

Looking at breadth, we can see that the bullish move has yet to reverse. To do this, we can use the Nasdaq advance-decline indicator, which looks at the number of rising and falling stocks. Traders can use the cumulative version of the chart (seen below), which subtracts the fallers from the risers and then adds the figure to the previous day’s number.

Nasdaq 100 chart Source: ProRealTime
Nasdaq 100 chart Source: ProRealTime

NAAD chart

As we can see, when NAAD rises, the price tends to rise as well. And if we add a moving average convergence/divergence (MACD) indicator, we have possible buy and sell signals. In addition, the use of a 13-day exponential moving average (EMA) and a 50-day simple moving average (SMA) further clarifies the outlook. At present, the 13-day EMA is still rising, and the actual indicator has moved above its 50-day SMA, a positive development, while its MACD continues to rise too.

This sends the message that short positions will not usually be effective apart from in short time frames. Until MACD reverses, the bulls remain in control.

NAAD chart
NAAD chart

Will the broader economic outlook drive price lower?

Of course, the broader economic outlook could well reassert itself, and we can expect the price to follow suit. But it is hard to argue at present that the big move lower that is so widely expected has really arrived. Instead, for now it looks like consolidation in price is the order of the day, followed up by a move higher for the index itself, underpinned by healthy breadth.

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