NASDAQ 100 update: Tech bubble reached its breaking point?

Intermediate

The tech rally this year has been the most incredible ride for traders in years. It quite reminiscent of the tech bubble in early 00’s, which of course created lots of division among analysts regarding the bubble burst. A rally like that must have a correction eventually, but the more NASDAQ kept on climbing, the stronger the fall was believed to be. We looked at the Elliott Wave analysis of the NASDAQ100 chart last time (see the link at the end) and concluded that 11000 was the potential level before the fall. Let us look at the reasons for the amazing rally to understand how price has reached its point and why what could be the first domino to topple it.

The 2020 COVID-19 pandemic became a blessing for tech companies. Lockdowns across the world made online services more important than ever with soaring demand. As most companies globally struggle, tech companies are now the best investment as their businesses are doing better than ever. The stimulus packages and tax reductions created an enormous increase in wealth provided by the governments. The rich became a lot richer. And trillions of USD was poured into the stock market to keep it from crashing. And as the chart shows, tech companies got the most of it. 

Another reason for the continued inflating of the tech market is the dramatic increase in the amount of retail traders this year. Almost 25% of all trading is now retail traders. This spike was caused by lockdowns across the globe as people started to turn to trading to make some money as they had bleak job prospects and needed to do something with the money they had. The biggest gainer is Robinhood, the California based online market provider. The company gives an opportunity to trade in every market via options with no fees and with as little as $1. The growth in the number of users has been so quick, that for now they cancelled their opening in the UK. People trading through Robinhood know little in terms of technical analysis, and mostly know how to buy stocks and that is about it. So, the bubble keeps on growing.

Robintrack stats
Robintrack stats
TSLA stats at Robintrack
TSLA stats at Robintrack

Above you can see the amount of holding positions in stocks at Robinhood from a robintrack.net website in the last month. Traders piling holding positions by the thousands. Also, look at the example of the TSLA chart with price (pink line) and number of positions (green line) for comparison. This continued growth in buying positions inflates the bubble, but also gives us a clear view that at some point they will want to close and take profit. And once the first domino falls, we could see massive profit taking and fall in NASDAQ100.

Weekly chart perspective:

Weekly NASDAQ July 26 2020
Weekly NASDAQ July 26 2020

Since the last time we looked at the NASDAQ100, the price completed its rise to 11000 level. Based on the Elliott Wave analysis, we are seeing potential end of the (b) wave in an expanded flat corrective formation. (c) wave down should be next, which should go in a 1-2-3-4-5 formation. The last 2 weekly candles show rejection at 11000 and show indecision at that resistance. RSI shows overbought level reached, so topping signals are there. Also, we see a retest of the upper trend line. A bearish signal from a weekly perspective would be a break and close of the candle below 10000.

Daily chart perspective:

Daily NASDAQ July 26 2020
Daily NASDAQ July 26 2020

Daily chart shows a Double Top pattern with divergence on RSI. This can give intraday traders space to make some short-term positions. A spike lower would be a signal to break the neckline. Minimum price objective is around 9800 round number. Important to notice the 50SMA and 10000 support levels on the way. At the moment of writing, indices look mostly flat with only slightly bearish numbers. We also have particularly important earnings coming this week, the top tech and financial as well as other industries will show their earnings and markets will hold their breath to see the results.

On the contrarian side, the bubble could continue to inflate further. The most crucial period comes in autumn leading up to the election in November and pre-Christmas period. At one point, the winner of the election is as unclear as ever. Another point is that inevitable profit taking of the positions will occur at the end of the year as traders will seek to capitalize their gains. For more information you can check my previous articles about the tech bubble.

Editor

Anton is an accomplished Director at Markom Development Ltd where he combines cross functional competencies in staff management, operations planning, customer retention and strategy development. BU...continued

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