Tech stocks led on the way up and so far they have been leading on the way down.
That is what allowed the Nasdaq to soar off the March lows, but it’s also what’s weighing down the index now, which was off more than 2% at Monday morning’s low.
Not surprisingly, mega-cap tech stocks are some of the biggest culprits for the index’s decline.
Names like Apple (AAPL) - Get Apple Inc. (AAPL) Report, Facebook (FB) - Get Facebook, Inc. Class A Report and Amazon (AMZN) - Get Amazon.com, Inc. Report were titans on the way up, leading tech and the market as a whole out of the doldrums earlier this year.
But they cannot carry the load forever, and as these names unwind so too are the indices.
Given the rally from the lows, the correction is not all that surprising. Particularly when considering the tense political environment ahead of the election and as the economy has not fully recovered from the coronavirus impact.
However, traders are now trying to determine if this is merely a correction - and if so, how deep - or if it’s the mark of a potential top where we could be in for a wild finish to 2020.
Trading the Nasdaq
As you can see on the chart, the Nasdaq suffered a quick three-day flush down to the 50-day moving average. While the index held that mark upon the initial test — no surprise there — it quickly became evident that 11,250 was forming as resistance.
That set up a make-or-break situation: Either the Nasdaq had to reclaim 11,250 or hold the 50-day moving average.
Eventually the “break” portion of that equation came to fruition, with the 50-day moving average failing as support. While the Nasdaq temporarily found support at 10,750, that mark failed on Monday, with shares gapping below that mark.
Now traders are stuck with the index in no man’s land.
Bulls either need to see the Nasdaq reclaim 10,750, then work on the 50-day moving average. Or they need a deeper pullback. Specifically on a deeper dip, I am looking at the 10,250 breakout area from July and the 100-day moving average.
Should the selling pressure accelerate through that level, it could put a retest of the 200-day moving average and February highs in play near 9,750. To be honest, this would be a great pullback opportunity.
In any regard, let’s see how it handles 10,750 on the upside and 10,250 on the downside.