If This Nasdaq Level Breaks It’s Gonna Get Ugly

The best technical analysis is the simplest. But first, for the TA haters: get over it. TA still gets a bad rap by people who see it as market mumbo-jumbo of a bygone era; the scammy weapon of choice by 80s and 90s Jordan Belfort types trying to sound smarter than the shmuck on the other end of the line. That’s not what it’s about.

Technical analysis is just a set of precise terms with which to describe what’s happened and what is happening in an asset. It describes direction, speed, momentum, and where the most important action takes place. Think about it as market GPS: the Google Maps for trading that tells you where traffic is, identifies important turning points, and in some cases, can tell you how far down you’ll have to go down a road before finding an off-ramp.

The most basic technical adage is “trend is your friend.” It’s investing in a nut shell: stocks go up over time. Don’t fight the trend. But what traders are learning the hard way in ARK stocks, cloud companies and quarantine trades — the adage cuts both ways. You have to respect downtrend, too.

By now everyone knows about the well-publicized bear market in the innovative tech fund ARKK. But what’s probably more important is the much newer downtrend in cloud stocks, which just entered a bear market this week:

If this happens in semiconductor stocks that are maintaining near-record elevation, the Nasdaq NDAQ won’t be able to sustain its equally elevated level. Chipmakers trade almost identically to the Nasdaq, but right now the Nasdaq is looking slightly weaker, resting on multi-month support and its September high around 15,600. If the Nasdaq slips much further, it’ll be the first violation of its 43% uptrend that began last September. That’s an important event from a TA perspective that opens up a downside target of the October low — around 14,700, or 7% down from here.

It’s important to connect the technical description to the fundamental narrative.

The current uptrend in the Nasdaq began in late September 2020, a very important time period in the market’s recent history that very few people give enough attention. The market was coming off its fastest 10% correction EVER — the Nasdaq dropped 10% in just two days, an even faster snap than the worst of the Covid crisis. It was led sharp drop in Tesla TSLA after the company sold $5 billion in a secondary offering.

As Tesla fell, growth stocks followed, and popular stay-at-home stocks took a drubbing. It was a glimpse into what a blow-off top in this highly speculative market might look like, if traders ever had reason to question its lifespan. But it wasn’t long after that 2020 winter Covid cases began climbing and investors understood another round of government support was on the way. With the exception of the ARKK fund, everything roared back.

A Nasdaq reversal now would fit perfectly within the context of a strengthening dollar, the breakout in yields, and unwind in bitcoin — all events that signal the end of the Covid trading era. It was one of the most powerful trends in market history. It will be very bearish if it breaks.