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Nasdaq 100 Forecast: March 2020 is likely to be a very choppy month

By David Becker

The implied volatility levels show that fear has reached extreme levels

The Nasdaq is trading on the defensive, as the coronavirus fears in the US start to percolate. There have yet to be cases of clusters of the virus, but the first case of coronavirus was uncovered in California that did not come from an international incident. This confirms what the markets have already been pricing in which is that the effort to contain the coronavirus in China has failed.

US bond yields are trading at all-time lows at 1.29 per cent, which is lower than bond yields were trading during the height of the financial crisis in 2008-2009. Fear is rising and implied volatility, which is used to price options that protect against an adverse market move, is moving higher.

The huge drop in the 10-year yield has buoyed the housing market as mortgage rates tumble. The commerce department reported that US single-family homes surged to a 12-year high in January. New home sales jumped 7.9 per cent to an annual rate of 764,000 units last month, the highest level since July 2007. With mortgage rates likely to continue to decline, refinancing is likely to rise to help to further buoy home sales.

Implied volatility is on the rise

The implied volatility on the Nasdaq surged in February rising 42 per cent in February and closing over 30 per cent for the first time since December of 2018. During that period the Nasdaq tumbled 19 per cent, following the Fed’s last rate hike. The Fed eventually came to the rescue, and cut interest rates 3-times during 2019, helping the Nasdaq notch up a robust 30 per cent plus gain. This time around the Fed is low on bullets and in recent days Fed officials have told journalists that they are in a wait and see mode. It appears at this point that the Fed is not willing to pull the trigger on rate cuts.

Nasdaq 100 analysis: technicals

The weekly chart of the Nasdaq shows that the uptrend is still in place. The first level of target support is an upward sloping trend line that comes in near 8,345. The next target is the 50-week moving average at 8,071. After this level, the target is the Fibonacci 61.8 per cent at 7,306. The first level of target resistance is seen near the 10-week moving average seen near 9,100.

Short term momentum is negative as the fast stochastic generated a crossover sell signal. This occurred in overbought territory which is above the 80- level. The current reading on the fast stochastic is 71, which, coming from overbought territory, reflects accelerating negative momentum.

Medium-term momentum is poised to turn negative as the MACD (moving average convergence divergence) index is poised to generate a crossover sell signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses below the 9-week moving average of the MACD line.

Nasdaq 100 predictions: bottom line

Negative sentiment is overwhelming the markets with the Nasdaq dropping 7 per cent in February. Looking forward, the implied volatility levels of the Nasdaq have already reached the peak seen in December of 2018, which shows that fear has reached extreme levels.

The 10-year yield shows that economic growth will likely slow, and stocks have yet to catch up completely. March is likely to be a very choppy month where stocks attempt to rebound but fail several times a bottom is put in place.

FURTHER READING: Global stocks fall after Apple posts coronavirus warning

FURTHER READING: What is the coronavirus and how could it affect stock markets?

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