Nasdaq analysis for March: the forecast for the month remains volatile

This week the index had the worst decline in its history. What may happen next?

On Monday 16 March, the 0'>Nasdaq index fell 12.3 per cent – the most the index has declined in its history. The plunge in the tech-heavy index came despite an announcement on Sunday 15 March that the Fed would cut key interest rates by 100-basis points, and embark on a bond purchase programme. The Federal Reserve reported that the central bank would buy up to $700 billion in bonds, which would include $500 billion of US treasury bonds and $200 billion of mortgage back securities bonds. Despite the attempts by the Fed to calm the market, the VXN Nasdaq implied volatility index surged, closing above 80 for the first time since the financial crisis.

What is happening?

The markets are not reacting to monetary policy as the crisis the world is facing is not a financial crisis but instead a public health crisis. The US is a service economy and 65 per cent of the annual growth comes from services. When restaurants, bars, health clubs, concerts, and movies are shut down because gatherings of 10 or more are prohibited, economic growth completely stalls. The data reported in China, for February, shows a severe contraction in growth, which may next show up in Europe and North America.

A look ahead to March data

The US March survey data is likely to show a sharp decline in growth. The first glimpse is very concerning. The New York Fed’s Empire State business conditions index tumbled 34.4 points to -21.5 in March. Expectations had been for a reading of 4.8. This is the lowest level since the financial crisis in 2009. The sub-components were very weak. The new orders index fell 31.4 points to -9.3 in March. Shipments fell 20.6 points to -1.7. The average workweek fell to -10.6 in March from -1. The number of employees fell to -1.5 from 6.6. Optimism about the six-month outlook dropped to 1.2 from 22.9.

Nasdaq technical analysis

The Nasdaq price action shows that the index has reached a 61.8 per cent retracement of the rise from December 2018 to the all-time highs. The Nasdaq predictions for target support is seen near the 200-week moving average at 6,583. Resistance for the Nasdaq index is seen near the 50-week moving average at 8,050.

Momentum is negative and accelerating. The MACD (moving average convergence divergence) index generated a sell signal during the last week of February and continues to accelerate lower. The MACD histogram also generated a crossover sell signal, slicing through the zero-index level with a negative trajectory. The reading on the MACD for the Nasdaq index is the lowest since 2000. This is the sharpest fall of the Nasdaq index since the dotcom bust.

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Short term momentum is also negative. The fast stochastic has accelerated lower and is printing a reading of 20, which is equal to the oversold trigger level. The picture is very similar for the relative strength index (RSI) which has also accelerated lower and reflects accelerating negative momentum. The current reading on the RSI is 30, which is equal to the oversold trigger.

Bottom line

The forecast for the Nasdaq for the balance of March remains volatile. With a Nasdaq VIX (VXN) above 80 per cent, the moves are likely to remain erratic. Price action points to a test of the 200-week moving average and then a bounce, as the Nasdaq Index is oversold. While the Fed has not calmed the markets, fiscal policy might be the antidote. However, there has been little movement on the fiscal policy front.

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