Chart Of The Day: NASDAQ 100 Falls Into A Bear Market…Expect Lower Lows Ahead |

On Monday, the slumped yet again, falling almost 2% for the day. It was the second day of declines in a row for the tech-heavy index, extending its losses to 4%.

It’s no secret to investors what’s triggered this rout—blame the Russian war in Ukraine. Conflict on the world stage dramatically increases geopolitical risk and uncertainty, given there’s no clear indicator as to when hostilities might end.

However, there are practical reasons as well for why markets are now crashing. Russia’s aggression triggered a broad yet powerful commodity shortage, propelling prices that were already rising due to decades-high inflation created by existing supply chain shortages caused by COVID lockdowns. Now, a variety of energy, base metal and agricultural commodities have been propelled to even loftier levels as the assault escalates.

Oh, and let’s not forget about the US monetary tightening cycle which is set to actively commence on as the Fed it will begin hiking rates. Anticipation of higher interest rates was already weighing on overvalued tech companies.

The NASDAQ is notable for being the second major US benchmark to slip into bear market territory, which officially occurs when the price drops at least 20% from a recent peak. The NDX is now down 21.22% from its Nov. 19 record close. The US benchmark to have the dubious distinction of entering a bear market first was the . 

For the NASDAQ 100 (as well as its small cap peer), the current general direction is expected to be lower until proven otherwise. In a bear market, rallies are opportunities to short, as they are seen as corrections within the downtrend.

The NDX completed a down-sloping H&S top after having violated the uptrend line since the March 2020 bottom. The pattern is lopsided since there hasn’t been sufficient demand to prop up the right shoulder, which would have been along the dotted red line.

Clearly, traders couldn’t wait to sell. Thus, this development is considered more bearish than a regular H&S top, with symmetrical shoulders.

The price’s peaks and troughs registered lower, establishing a downtrend, plainly defined within the falling channel.

The price fell below the 50-week MA at the beginning of the year, then attempted to climb back up in both February and March. Ultimately, both efforts failed.

Yesterday the price fell below the 100-week MA. Note how the latter coincided with the neckline, confirming its validity. Additionally the price rose intraday, touched the neckline, then retreated, closing below the 100-week MA.

The 50 DMA also crossed below the 200 DMA, triggering an ominous death cross on the daily chart. 

The next test is the support and resistance area at mid-12,000 levels.

Trading Strategies

Conservative traders should wait for the price to close below 13,000, then for a return move to retest the neckline’s resistance before considering a short.

Moderate traders would also wait for the same close below the psychological round number and a corrective rally for a better entry, if not for confirmation of the pattern’s integrity.

Aggressive traders could go short at will, according to a preset trading plan that fits their needs and to which they are committed. Here is a generic example:

Trade Sample – Aggressive Short Position

  • Entry: 13,500
  • Stop-Loss: 14,000
  • Risk: 500 points
  • Target: 11,500
  • Reward: 2,000 points
  • Risk-Reward Ratio: 1:4

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