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Nasdaq forecast for February: price could experience volatility next month

By David Becker

Technical indicators suggest prices could correct and remain choppy

The Nasdaq appears to be taking a breather in the final week of January but is poised to experience a more volatile month in February. Seasonals show the index has delivered mixed returns in February, while the technical picture shows a market that has run too far too fast.

Nasdaq forecast in February: seasonals are mixed

A seasonal pattern provides a historical map of returns during a specific month. Over the last five years, the Nasdaq has been higher 60 per cent of the time, with an average return of 2.3 per cent. Over the last 20 years, February has been unchanged on average, rising 50 per cent of the time. So, historically February has no discernible pattern. This compares with July where the Nasdaq has been higher 100 per cent of the time in the past ten years.

Nasdaq technical analysis

The Nasdaq weekly technical chart shows a protracted trend. Prices are overbought on a weekly basis. The relative strength index (RSI) is reading 73, above the overbought trigger level of 70.

RSI is overbought

The RSI is a momentum oscillator. Readings above 70 are considered overbought while below 30 is considered oversold. The RSI has a downward trajectory that reflects accelerating negative momentum, which points to lower prices. Last time the RSI moved up to an overbought reading of 81, it corrected back to the 20-week moving average, which is approximately a 7 per cent drop from current levels.

The fast stochastic is overbought

The fast stochastic has also generated a crossover sell signal in overbought territory. The crossover sell signal reflects accelerating negative momentum. The current reading is nearly 90, well above the overbought trigger level of 80, which could foreshadow a correction.

Positive momentum is decelerating

Medium-term positive momentum has decelerated. The trajectory of the MACD (moving average convergence divergence) index has decelerated. The index is moving sideways and the histogram is declining from its peak. The acceleration in the value of the Nasdaq pushed the MACD to elevated levels, where it will take time for a sell signal to develop.

Support on the Nasdaq is seen near the 20-week moving average at 8,403. Resistance is seen near January highs at 9,280.

Earnings season

Sentiment in the market is near all-time highs and volatility has pushed higher. Earnings appear to be slightly better than expected, which should help buoy shares near current levels. The OVX, which is similar to the VIX but for the Nasdaq, surged by more than 45 per cent in the past week but appears to be stabilising. The rise in volatility has probably returned.

Nasdaq prediction for February

The oversold conditional is likely to bring increased volatility and a choppy retracement. The beginning of February could be rocky despite robust earnings. An accommodative Fed will probably provide support as prices edge lower.

FURTHER READING: Nasdaq 100 forecast for 2020

FURTHER READING: S&P 500 forecast for 2020

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