Bulls tried to put foot down on Monday. If they succeed in building on this further, the next tug of war on major indices lies around their respective 50-day, reclaiming of which can even induce short squeeze, particularly in tech.
After three consecutive down weeks, major US equity indices this week picked up where they left off. Monday, stocks opened down big, but only to see the last hour in particular repairing most of the damage. In fact, the Nasdaq 100 index, down 2.4 percent at one point, ended up 0.4 percent. The Nasdaq composite, on the other hand, lost 0.1 percent but was down as much as 2.5 percent intraday. Tech fared a lot better. The S&P 500 large cap index, for instance, dropped 1.2 percent.
Tech’s outperformance preceded increased shorts activity in recent weeks. From the September 2nd peak through Monday’s low, the Nasdaq 100 quickly shed 14.2 percent – decent enough drop for shorts to want to lock in.
At the end of August, Nasdaq short interest rose 3.3 percent period-over-period to 9.4 billion – not that far away from 9.5 billion at the end of June, which was the highest since mid-September 2008. Then, as of last Tuesday, non-commercials were sitting on 80,871 net shorts in Nasdaq 100 index (mini) futures, which was the highest since April 2008 (more on this here, including charts). In the right circumstances, this can act as a tailwind for these indices – provided shorts get squeezed.
Technically, the Nasdaq 100 (10980.22) has not yet suffered an irreparable damage but is bruised. Last week, it lost the 50-day moving average as well as horizontal support at 11000. Earlier, it lost a rising channel from the March low (Chart 1).
Importantly, the 50-day is no longer rising on the index, rather flattish. Of the big five constituent stocks, Apple’s (AAPL) is slightly rising to flattish, Microsoft’s (MSFT) slightly falling, Amazon’s (AMZN) slightly falling, Alphabet’s (GOOG) slightly falling and Facebook’s (FB) slightly falling to flattish.
Hence the need for tech bulls to act fast. The sooner they can build on Monday’s action, the better. Reclaiming the 50-day might even induce short squeeze, if that did not already occur on Monday.
The Nasdaq 100 led yesterday but bulls also put foot down on both the S&P 500 large cap index and the Russell 2000 small cap index.
After peaking on the 2nd at 3588.11, the S&P 500 (3281.06) lost the 50-day last Friday and proceeded to drop all the way to 3229.10 intraday Monday before drawing bids. Horizontal support at 3220-30s goes back to December last year and it held (Chart 2).
Over on the Russell 2000 (1485.25), small-cap bulls were vehemently denied just north of 1600 on August 11. This level has proven to be an important price point going back to January 2018. Early this month, they once again rallied the index to 1590s both on the 2nd and 3rd, but only to soon run out of steam. Nearest support lies at 1450s-60s, which was just about tested on Monday, with the intraday low of 1470.44.
Bulls have an opportunity here to try to regroup and go after the 50-day on all three indices. There is room on the daily to rally. Inability to cash in on this opportunity will mean the unwinding of several extended metrics continues – might even pick up speed.
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