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Strong E-mini NASDAQ-100 Index: Poised for New Highs or Ripe for Near-term Correction?

By:
James Hyerczyk
Published: Dec 26, 2015, 11:56 GMT+00:00

The Weekly Nearby E-mini NASDAQ-100 Index futures chart shows that this market is the strongest of all the major indices. This is probably because it

Weekly Nearby E-mini NASDAQ-100 Index

The Weekly Nearby E-mini NASDAQ-100 Index futures chart shows that this market is the strongest of all the major indices. This is probably because it doesn’t have as much exposure to the energy sector as the S&P 500 and the Dow Jones Industrials and it is not as sensitive to interest rates as much as the small-cap Russell 2000 Index.

Weekly Nearby E-mini NASDAQ-100 Index
Weekly Nearby E-mini NASDAQ-100 Index

Recapping the price action in 2015, we can see that with the exception of the huge break in July and August, which was fueled by the market meltdown in China, the NASDAQ-100 Index trended most of the year. This is evidenced by the series of higher tops and higher bottoms.

Investors also seemed to ignore the Fed’s early-in-the-year warnings about the slowdown in the economy as well as Fed Chair Janet Yellen’s warning in May that she still expected the Fed to start raising its benchmark interest rate later this year.

Although the Fed’s statement on April 29, which said the economy “slowed during the winter months” and Yellen’s comments on May 22 started prolonged sideways price action, the market was still able to rally to a new high for the year the week-ending July 24 at 4671.25. This occurred during the midst of the stock market meltdown and shortly before the July 29 Fed statement that showed the Fed displayed calm despite global concerns, saying “economic activity has been expanding moderately.”

The bottom at 3893.50 occurred after China injected a huge amount of cash into the economy and took aggressive action to stop the meltdown in its stock market. A surge to a new high at 4723.50 took place as investors began to doubt whether the Fed would raise rates at all in 2016.

A short-term top was formed the week-ending November 6 when the U.S. Non-Farm Payrolls report for October blew away the forecasts. The final top for the year at 4733.25 formed the week-ending December 4 at about the same time the ECB surprised investors by introducing a stimulus plan that was less than expected. The plunge in the U.S. Dollar and the rally in the Euro may have contributed to the formation of the short-term top.

The index rallied shortly before the Fed raised rates on December 16 and formed a short-term top on the daily chart the day after. The rate hike is now old news and investors are already focusing on the timing of the next rate hike. According to the Fed Funds indicator, the next likely rate hike should take place in June 2016.

The NASDAQ-100 Index is the strongest of the major indices, but it is not immune to a correction or to the formation of a major top. Although it is the strongest index, it is still correlated to the other indices. If the Dow, S&P 500 and Russell indices continue to produce lower-tops and lower-bottoms then they will drag down the NASDAQ-100 Index.

Barring a sooner-than-expected rate hike by the Fed or another market meltdown in China, the NASDAQ-100 index is expected to hover around its all-time highs. The first sign of weakness will be a trade through the recent swing bottom at 4448.75. A major shift in investor sentiment will be signaled by a breakdown through the August bottom at 3893.50. 

About the Author

James Hyerczyk is a U.S. based seasoned technical analyst and educator with over 40 years of experience in market analysis and trading, specializing in chart patterns and price movement. He is the author of two books on technical analysis and has a background in both futures and stock markets.

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