Nasdaq 100: Path of Least Resistance Remains to the Downside as Key Earnings Loom

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Like the day before, European stocks regained some ground in early trade, ahead of the open on Wall Street, helping lift US index futures slightly. There wasn’t much in the way of positive news to soothe investor nerves.

Perhaps there was some relief that so far, Israel seems to have responded primarily through diplomatic means.

Nevertheless, it hasn't dismissed the possibility of a different response, despite ongoing calls from global leaders for restraint to avert a broader conflict in the Middle East.

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On Wednesday, some of the early optimism in Europe was driven by mostly positive earnings, but this time there was much in the way of company news. Attention will be on earnings from the likes of Netflix (NASDAQ: NFLX ) and Blackstone (NYSE: BX ) today.

On a macro front, we have initial US jobless data and speakers from the heads of the BoE, BoC, and Fed. But just like on Wednesday, we could see the early strength fade once US investors join the fray as macro concerns continue to linger.

However, concerns about higher interest rates remain a key driver behind the recent sell-off in stocks. Those concerns intensified after the UK’s inflation fell less than expected on Wednesday.

We have seen several Fed officials including Chairman Powell sounding more pessimistic about inflation, further fuelling fears over a more hawkish outlook for interest rates.

Let’s not forget about the geopolitical concerns in the Middle East, which remain at the forefront of investors’ minds.

Therefore, company earnings, as good as they are, may only provide a temporary lift as the macro outlook has dimmed for stocks in recent weeks.

Up to earnings to lift the mood

Over the past few weeks, stocks have encountered downward pressure. Traders are closely monitoring the escalating Middle East conflict and have been recalibrating their expectations regarding the timing and extent of Federal Reserve interest rate cuts.

Consequently, any prospect of market rebound now hinges significantly on corporate earnings. This was evident on Wednesday as positive earnings in Europe lifted the indexes, if only temporarily.

Will we see more forecast-beating earnings as we head deeper into the earnings season? If so, this is something that could help alleviate pressure on the indexes.

The earnings season for US tech giants is about to kick off, starting with Netflix today, due to release its results after the close of play.

Although Netflix has ceased providing guidance on its subscriber growth, the increase in users continues to be a crucial metric for its earnings announcement. Let’s see if its results will justify the stock’s outperformance.

Markets under pressure so far in Q2 amid geopolitical risks and interest rates outlook

While US index futures have rebounded alongside European shares, the question remains whether this recovery will spark a rally or merely represent a temporary bounce, akin to recent days.

Both US and global stock indexes have fallen out of favor in recent weeks, as investors exhibit hesitancy towards risk-taking.

This was hardly surprising as they took profit ahead of earnings season and particularly following the record-breaking performance witnessed in the five months leading up to April.

The primary concern for investors is the escalating tensions in the Middle East, with Israel seeking retaliation for Iran's recent attacks on Saturday, creating added uncertainty.

Furthermore, investors are growing increasingly apprehensive about the rising yields on benchmark government bonds, as the possibility of a June rate cut by the Fed diminishes.

Initially, traders had priced in approximately six rate cuts for 2024, but uncertainty now looms over the likelihood of even receiving a 50 basis point cut by December.

The mounting government debt and its associated financing costs are significant concerns for investors, which explains the upward trajectory of gold prices despite the higher yields.

The International Monetary Fund voiced criticism on Tuesday towards US policymakers for adopting unsustainable fiscal policies, which, while contributing to the nation's recent economic success, could lead to inflation and global financial instability if left unchecked.

These macroeconomic factors, coupled with profit-taking by investors, have caused major indexes to breach key technical levels, much to the satisfaction of bearish investors.

QQQ technical analysis and trade ideas

The QQQ chart, which tracks the performance of the Nasdaq 100 index, showed further downside follow-through after breaking key support a couple of days ago at 434.

QQQ Daily Chart

Monday's breakdown of that support level also pushed it below the 21-day exponential moving average and a short-term bullish trend line.

The market consolidated on Tuesday before breaking further lower on Wednesday. So, the path of least resistance is clearly to the downside, at least as far as the short term is concerned.

Unless we see a clear bullish reversal pattern in the next couple of days, I think the more likely outcome is that we could see further weakness towards the shaded blue area on the chart.

That area marks the highs from 2021 and 2023, at 408.71 and 412.92 respectively. This area was a major resistance those years, which means it could now turn into support upon returns from above should we get there.

In the interim, short-term support is seen at around 425, where the selloff stalled on Wednesday. This level was the head of the hammer candle that was formed on 21st of February, which led to a gap that never got filled until Wednesday.

The fact that index futures have bounced off this level therefore comes as no surprise. For the bulls to regain control around current levels, though, we will need to see the breakdown of some key resistance levels starting with 429.70 and then 434.00. Otherwise, watch out below.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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