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Among the large US indices, the Nasdaq 100 has fallen the furthest from its highs. However, we’re starting to see signs that the tech benchmark could be oversold.

 

We can see on the weekly chart that, having fallen over 15% from its highs, the Nasdaq is now within its second worst drawdown since the Nasdaq bubble burst. Interestingly, the prior two times it has falled 15% or more post-bubble, the index has posted a solid recovery. Whilst this may not provide a solid buy signal within its own right, it does provide food for thought and send a warning to bears, especially given the clues on the daily chart.

Switching to the daily chart shows the index remains within a downtrend with its series of lower highs and lows. However, a bullish divergence with RSI warns that downside momentum is waning, and prices have since returned above the lower Keltner band to show mean reversion is now underway.

Since falling from the 7700.6 high there have been three occasions where it has bounced back above its lower Keltner. And whilst the current move from 6442.4 has recovered by 3.8% already, it’s worth noting that the prior two rebounds above the lower Keltner retraced around 6.1% and 9.6% from their lows. Considering the choppy nature of the bearish trend structure, a rebound of similar magnitude is not impossible. Using the 6.1% and 9.8% retracements as a hypothetical guide we could see the Nasdaq rebound towards 6835.4 (near the 20-day average) or 7060.9.

 

This could provide bullish opportunities for counter-trend traders or serve as levels to seek signs of price exhaustion with a view to short the index later, in line with dominant momentum.

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Matthew Simpson CFTe,Senior Market Analyst (Asia)