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Nasdaq 100 forecast for January 2020

By David Becker

Technicals show an overbought condition that could foreshadow a correction

The Nasdaq 100 is poised to increase more than 4 per cent in December, but the outlook for January 2020 is cloudy. Historically, the Nasdaq has increased about 50 per cent of the time over both the past 10 and 20 years, showing no distinctive seasonal pattern.

Implied volatility on the Nasdaq 100 has dropped to a two-year low in December 2018, declining to 13.5 per cent which shows that complacency has engulfed market participants as the Nasdaq 100 hit a fresh all-time high. Additionally, the technicals describe a Nasdaq 100 forecast that reflects an overbought condition and could foreshadow a correction.

What is the Nasdaq 100?

The Nasdaq 100 Index reflects the 100 largest and most liquid companies listed on the Nasdaq stock exchange. While it incorporates the returns of several industries such as financials and industrials, the Nasdaq trend is driven by a few very large companies such as Apple, Microsoft, Alphabet and Amazon. The index is calculated with a capitalisation methodology. This method uses individual weights according to their market capitalisation. The process is modified allowing the exchange to review the composition of the index every quarter and adjust the weightings so one company does not dominate the movements of the index.

A Nasdaq 100 analysis shows that during December the large-cap technology companies were the key drivers of the index. Apple has increased more than 8 per cent in December, Microsoft increased more than 5 per cent, Amazon rose nearly 4 per cent, and Alphabet was up nearly 4 per cent in December.

Seasonal Nasdaq 100 predictions

During the past 20 years, the Nasdaq 100 has increased 50 per cent of the time and declined 50 per cent of the time for an average gain of 0.9 per cent. During the past 10 years, a seasonal Nasdaq forecast shows that the index has increased 50 per cent of the time and decline 50 per cent of the time for an average gain of 0.2 per cent. The underlying theme is that there is no seasonal effect on the index during January.

Technical Nasdaq 100 forecast

The Nasdaq chart today shows that the index is overbought, as sentiment has increased to robust levels. Using both the fast stochastics, which is a momentum oscillator that generates overbought and oversold levels and the relative strength index, a momentum index, you can draw the conclusion that the Nasdaq 100 is overbought.

The chart of the Nasdaq forecast shows daily price levels that appear toppy. The fast stochastic has generated a crossover sell signal in overbought territory. The Nasdaq 100 is considered overbought when the fast-stochastic prints a reading that is above 80. Levels on the fast stochastic below 20 are considered oversold. The current reading on the fast stochastic is printing at 92, which is well above the overbought trigger level. While the fast stochastic produces short-term overbought and oversold levels.

The relative strength index (RSI) has only produced an overbought Nasdaq 100 forecast four times in the past two years. The RSI produces an index between 1 and 100. Readings above 70 are considered overbought while reading on the RSI below 30 is considered oversold. A Nasdaq 100 forecast using the RSI would lead to the conclusion that the Nasdaq 100 is overbought. In each of the 4-prior periods when the RSI moved above 70, the index experienced a correction.

Positive momentum is also declining. The MACD (moving average convergence divergence) index is a momentum index that uses the difference between a short term and long-term moving average to determine implied volatility. The MACD histogram is beginning to decline and has a decreasing trajectory.

Nasdaq 100 volatility

One way a trader can evaluate the Nasdaq predictions is to use implied volatility. This tool measures how far traders believe an asset will move over the next period on an annualised basis. For example, implied volatility of 20 per cent on the Nasdaq 100 means that market participants believe that the Nasdaq 100 index will move 20 per cent from current levels over the next 12 months.

Investors can measure the implied volatility of the Nasdaq using the Chicago Board of Options Exchange OVX index, which is very similar to the VIX volatility index. This measures the implied volatility of the “at the money” options on the Nasdaq 100.

During December the OVX hit a fresh two-year low of 13.5 per cent and then rebounded in the last week to 16.5 per cent. The highest daily closing level of the OVX implied volatility index in 2019 was 48 per cent. The 200-day moving average of the OVX is 33 per cent, which means that at 16.5 per cent, the volatility index could double and still only hit the annual average. This tells investors that sentiment is very high and expectations are that the Nasdaq will continue to rise and experience little volatility.

Nasdaq 100 forecast

The key takeaways are that the Nasdaq has moved higher in a straight line, pushing sentiment higher throughout December. The seasonals do not point to any clear direction for the Nasdaq 100 during January.

The technicals point to an overbought index that is likely to correct in January. With both the RSI and the fast stochastics, readings are in overbought territory. The MACD shows that positive momentum is beginning to decelerate.

Additionally, the implied volatility index OVX, which measures the “at the money” implied volatility of the Nasdaq 100, shows that complacency has set in and points to a pick up in implied volatility. The combination of these measurements points to a correction in January for the Nasdaq 100 index.

FURTHER READING: Nasdaq 100 forecast for 2020

FURTHER READING: FTSE 100 forecast for 2020 and beyond

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