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By: Matt Simpson, Market Analyst
The Nasdaq 100 has suffered its sharpest pullback in months, with volatility surging after the index failed to hold above the 30,000 milestone. While traders debate whether this is a routine correction or the start of something larger, futures positioning data had already begun flashing warning signs before the selloff accelerated.
It has been a week since the Nasdaq 100 last printed a record high. Since then, the tech-heavy index has fallen as much as 8%.
Naturally, the rise in bearish momentum has been accompanied by a surge in the Nasdaq’s volatility index (VXN). The VXN measures implied volatility over the next 30 days, with a reading of 29.78 representing an annualised level of expected volatility. The daily chart shows the VXN has risen back above its long-term average of 25.05, while Tuesday’s 8.1-point jump marked its largest daily increase since November.
What makes the 8-point rise particularly interesting is that daily increases of this magnitude have historically occurred near turning points for the Nasdaq 100, whether at major peaks or troughs. However, the absolute level of the VXN is not yet extreme, nor is the Nasdaq 100’s 8.3% decline from its record high to Tuesday’s low. Therefore, the jury remains out on whether the worst of the decline has already passed or if the bears are only just getting started.
Source: CBOE, NASDAQ, TradingView
The weekly chart shows a strong uptrend leading into the record high set two weeks ago. However, momentum turned sharply lower following a false break above 30,000, leaving a bearish outside candle at the record high. Incidentally, it was the most bearish week for the Nasdaq 100 in over 10 weeks, occurring just as the index approached the correction low that preceded its latest rally.
Clues from futures positioning were already sending smoke signals. Leveraged short exposure has risen to a three-year high, likely reflecting a mix of hedging activity and speculative bearish bets against the Nasdaq. Asset managers are also becoming less bullish, with gross long exposure falling for a second consecutive week from arguably stretched levels, dragging net-long exposure lower. While short exposure remains relatively low, it too increased for a second week among this group of traders.
Source: CME, LSEG
The daily chart shows that a wide-legged doji formed on Tuesday, finding support at the 50-day EMA. Given that bulls managed to recover most of the session's earlier losses, I am inclined to suspect the Nasdaq could remain supported over the near term, and perhaps a cheeky bounce is due.
However, if we have only witnessed the initial A-wave of an ABC correction, further losses could arrive after any such bounce. In that scenario, a break below the 28,227 low would suggest a deeper correction is underway. Note that the April VPOC, October high and 50% retracement level all reside around the 26,800 area. The 100-day EMA near 27,200 and the 38.2% Fibonacci retracement level at 27,808 could also provide support along the way.
The 4-hour chart shows that Tuesday’s low also respected the monthly and weekly S1 pivot levels. Prices are consolidating within a tight range, and retracements into Tuesday’s lower H4 wick could tempt bulls seeking a mean-reversion move higher towards the weekly and monthly pivot levels around 29,500.
Needless to say, 30,000 remains an obvious target for bulls and a key area of interest for bears seeking another leg lower.
Source: ICE, TradingView
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