Stocks dumped


Stocks have slumped after Wall Street opened, with the S&P hitting its lowest level on the week, down 1.1% when I started writing this report, while the Dow was off by more than 400 points.



The FTSE, already underperforming this week, was also hitting session and weekly lows. Copper prices eased sharply off highs and crude prices plunged about 2-3 percent. Risk off hit FX markets as commodity dollar plunged and the US dollar rebounded.

There was no obvious trigger behind the risk off trade, but news that the US Supreme Court has ruled that a NY Grand Jury can get access to Trump's tax records seems to have unnerved some investors who until now might have been convinced Biden had little chance of winning the election. But now there is a real ‘risk’ that this might turn out to be the case and rather than the business friendly-Trump.

Investors have also been digesting lots of bearish news including the rising Covid-19 infections and geopolitical tensions, with China, for example, saying that it may take action as Australia violated non-interference rule regarding Hong Kong.

Also concerning is the still-high jobless claims figures, raising fears over the financial health of US consumers. Unemployment claims once again remained comfortably above the 1 million mark again as fresh data showed 1.314 million applications were made in the previous week. Indeed, according to a survey by Apartment List, an online rental platform, almost one-third of US households have not made their full housing payments for July yet. This is concerning to say the least.

Let’s see whether stocks will gain traction on the downside though as so far, every dip has been bought in the US, especially for tech stocks.

Actually, I wanted to concentrate on the tech-heavy Nasdaq 100 anyway because I was going to highlight how overbought it was looking. The index has this week surpassed the 127.2% Fibonacci extension of the BIG downswing that ended in March:

Nasdaq 100
Source: TradingView.com and ThinkMarkets

But today’s drop for the wider markets has caused even the mighty Nasdaq 100 to turn lower on the day. If it closes around current levels or lower, it will have formed a bearish-looking reversal candle on its daily time frame. This, if realised, would be a bearish outcome on its own but the fact the reversal potentially happens near a Fibonacci extension level and given the negative divergence on the Relative Strength Index (RSI) would make it even more compelling for the bears.

Mean reversion likely

Regardless of what happens today, it is worth pointing out that there is a risk for mean reversion to hit the Nasdaq. As can be seen from the chart, the index is a good 1900 or 18% away from its 200-day moving average! The last two times it neared the 20% mark, we saw big moves in the opposite direction (see chart). So, a correction is very likely to happen soon, even if today’s selling stalls.



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