Just mere hours before the election results from each separate state start pouring in, the stock market is at an impasse. Yesterday, tech stocks were able to recuperate slightly following a massive plunge last week, which is a sign of resistance from the market bulls. Nevertheless, the continuation of the bullish rally is still very much in question.
Depending on who wins tonight, the Nasdaq is likely to react in slightly different ways. If its Biden, the index could continue fluctuating in a narrow range, possibly extending the bearish correction in the near future. That is so because of his tax plans for the wealthy, and the general perception of how such bigger taxes could impede the stock market's performance.
Such downbeat reactions to a Biden presidency are highly unlikely to persist for too long, as he has been leading steadily in the polls since April. This means that the market has had enough time to price the longer-term implications of a democratic administration at the White House. Moreover, the accommodative monetary policy stance of the FED coupled with the robust economic performance that has been observed recently – manufacturing and durable goods orders - should continue to support the stock rally.
If, however, Trump manages to snatch a somewhat surprising re-election tonight, the Nasdaq could jump, similarly to what happened in the wake of the 2016 republicans' victory. That is so because Trump pledged to keep the American economy open, despite the surging coronavirus cases in the states.
As regards Biden's agenda for tackling the pandemic, he seems more likely to reintroduce partial lockdowns in areas with confirmed infection spikes. Even if he does so, the technological sector has already demonstrated substantial resilience to the adverse fallout from such economic closedowns during the first wave, so there is no logical reason to expect a Biden's presidency to bring about an end to Nasdaq's rally.
Overall, a fundamental examination of the Nasdaq reveals that the index is most probably going to continue advancing further north in the longer-term. However, depending on who comes on top tonight, the tribulations for the index could be extended in the near future before bulls regain full control.
As can be seen on the daily chart below, the price action of the Nasdaq could have already established a Double Top pattern just above the psychologically significant resistance level at 12000.00. While such patterns typically entail the development of bearish reversals, this does not necessarily have to be the case at present.
The index is currently consolidating just above the 100-day MA (in blue), which represents a crucially important floating support, and a potential turning point for the direction of the price action. Moreover, the moving average is presently converging towards the 23.6 per cent Fibonacci retracement level at 11103.68, which, too, bears considerable psychological significance.
Given that the 20-day MA (in red) remains threading above the 50-day MA (in green), a termination of the current bearish correction seems highly probable to occur now, at the spot price. If, however, the price action fails the current test level and breaks down below the 23.6 per cent Fibonacci, it could consolidate within the boundaries of the Test Area next.
The lowest that the price action could tumble to before the bulls regain control is the 38.2 per cent Fibonacci retracement at 10274.21. Correspondingly, the next bullish upswing is bound to test the psychological barrier at 12000.00 one more time.
The technical outlook on a chart with a smaller timeframe is slightly different. The price action is currently probing the upper boundary of the Test Area, which is encapsulated by the 23.6 per cent Fibonacci, as can be seen on the 4H chart below. Its lower limit can be found at around the 10750.00 price level.
The latter is determined from the lowest point of the ABC correction that ensued following the Nasdaq's all-time record at around 12400.00 – the dip at point C. After the ABC correction was completed, the price action went on to establish a bullish 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory. It peaked at point 5 just above the major resistance at 12000.00. From it, a descending trend line can be drawn, which could then be used to test subsequent bullish upswings.
Notice that the area around the peak at point B and the height of the impulse leg 2-3, serves the role of a major Bullish Test Area. Hence, the strength of any future upswings is likely to be tested within set area, and the behaviour of the price action within this area is going to demonstrate traders the exact extent of the underlying bullish commitment in the market.
Conversely, a breakdown below 10750.00 would mean that the price action is ready to enter within the Bearish Test Area, which correspondingly would test the underlying bearish commitment in the market.
At present, the prevalence of selling pressure could be inferred from the MACD indicator, which is underpinning strong bearish momentum, and also from the Parabolic SAR indicator.
In determining how to position themselves, traders need to observe two key developments – the outcome of the US Election, and the behaviour of the price action around the 100-day MA. Overall, the underlying market setup seems favourable for the implementation of trend-continuation strategies around the aforementioned moving average; however, the bulls should keep in mind that the anticipated surge of uncertainty stemming from the Presidential Race could cause adverse bearish fluctuations in the near future.
The price action of the Nasdaq is currently consolidating around a crucial resistance level, and its behaviour around this psychological barrier is going to demonstrate how the underlying sentiment is presently changing. As it is about to be seen, the market appears to be forming a trend-reversal pattern at present, which would entail the subsequent emergence of a new downtrend; however, a decisive breakout above the above-mentioned resistance would manifest a likely continuation of the prevailing uptrend.
That is why the underlying fundamentals are probably going to play a significant role for the near future of the index, especially in light of the seemingly uneventful week ahead. On the one hand, the continued depreciation of headline unemployment in the US is a good thing for the strengthening of the technological sector. On the other hand, further monetary policy interventions by the FED could take place in December at the earliest, which means that the index remains vulnerable to sudden ripples until then.
While the encouraging vaccine news by Pfizer and BioNTech have excited the global stock market, the resulting investors' enthusiasm is poised to have a diminishing effect on the Nasdaq as more and more people realise that much of the coronavirus-related problems for the global economy persist.
At any rate, even if the Nasdaq does continue to rise by the end of the year, given the weight of the accumulated selling pressure, the index looks poised to form at least one more sizable correction in the following weeks.
As can be seen on the 4H chart above, the price action has been consolidating in an increasingly narrower 'bottleneck' since late-September. This can be both an indication for a future trend-reversal or an interim stage in the development of the broader uptrend, depending on how the price action behaves around the major resistance level at 12000.0 next.
The price of the Nasdaq has already failed to break out above the resistance on three separate occasions, and it will take only a decisive breakout (point A) to ensure the continuation of the bullish rally. In contrast, the increasingly more concentrated price action – the development of narrower swing lows and swing highs – is taking the form of a 1-2-3-4 pattern, which could pan out to be a trend reversal signal.
A breakdown below the 23.6 per cent Fibonacci retracement level at 11103.68 would complete the pattern (at point B) and would allow the price action to extend its dropdown towards the next major support – the 38.2 per cent Fibonacci at 10274.21.
While it is clear what bulls need to look for in order to use trend-continuation strategies, bears need to be more cautious in utilising contrarian trading strategies. On the one hand, the testing of the 200-day MA (in purple) followed by a test of the 300-day MA (in orange), elucidates the rising bearish pressure. On the other hand, the execution of selling orders would be warranted only on the condition that the price action does rebound from the 12000.0 resistance level.
At any rate, both bulls and bears should monitor the behaviour of the price action around this resistance, as the bottleneck setup unfolds, before they place any orders.
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