Nasdaq 100 Looks Weak Despite a New All-Time High

Summary:

Nasdaq 100 in danger of forming a head and shoulders pattern. The market looks weak if if breaks the higher lows series in the days ahead.

The Nasdaq 100 index made a new all-time high yesterday, just before the FOMC Minutes were released. The tech index remains bid while close to its highs, although the technical picture shows some signs of weakness.

Since the June FOMC meeting, the market participants’ expectations regarding the tapering of the asset purchases increased significantly. Many traders expected that the tapering would be mentioned in yesterday’s minutes, but there was no sign of it. Yet, the stock market reacted negatively to the release, and the pressure continues if we look at the futures market.

The earnings season is about to start, and that may trigger a new leg higher for the Nasdaq 100 index. The chances are that the big tech companies have beaten expectations in the second quarter as the global economy recovers from the COVID-19 pandemic.

Traders should remember that the Fed is not expected to taper the asset purchases now – the discussion is only about the announcement. In order to avoid a similar taper tantrum as in the past, the Fed promised to communicate its intentions properly. Therefore, the bond-buying will continue even after the tapering’s announcement, likely at the same pace of $120 billion a month until the end of the year.

Nasdaq 100 Technical Analysis

While early, the technical picture suggests a possible head and shoulders pattern in the making. Trading it is risky while the index remains close to its all-time highs. As such, conservative traders may want to wait for the market to break the higher lows series before shorting.

Therefore, bears may want to sell short the index by the time it closes on a daily basis below the 14,400 area, place a stop at the highs, and use a risk-reward ratio of 1:3 to set the take-profit. Alternatively, the take-profit level could be set at 13,200.