While US futures contracts were all low ahead of Tuesday's Wall Street session, stock futures outperformed. This morning's global stock sell-off is fueled again by mounting fears about the as-yet-unknown dangers of the Omicron variant.
The 'leadership' of NASDAQ futures indicate markets are pulling out of reflation trading, reflecting optimism of an economic recovery, instead returning to what proved successful during the first wave of the COVID-19 pandemic: tech sector growth stocks listed on the index. Tech products and services made lockdowns and work-from-home conditions feasible and bearable, leading tech companies to market loved ones.
The world is not in the same place it was during the earlier waves of coronavirus because we now have effective vaccines – even if it's unclear how effective those vaccines are against Omicron. Traders, however, seem to be overreacting, as sentiment rears its head with each new headline.
Perhaps the technical principles of supply and demand can shed some light on where growth stocks might go next.
NDX Daily
The technology-heavy index is still in an uptrend with peaks and troughs. In the short term, the price has fallen below the uptrend line since its mid-October low, indicating that this particular trend could be slowing.
While yesterday's trading was positive for the NDX, the index did not reach higher than the November 4 high. As futures indicate a likely sell-off during today's US session, we may witness the development of a right shoulder towards an H&S top, complete with a downside breakout, reaching the 16,000 level.
The MACD's short MA attempted to come back above the long MA but failed, showing a weakening in current pricing. Both the RSI and ROC – different ways of calculating momentum – are also bearish, suggesting that the price will indeed peak in the near term. The RSI completed its own H&S top, while the more sensitive ROC found resistance after breaking the support.
Even if this scenario comes true, it will retest the uptrend since the March 2020 bottom, and then we'll see if smart money picks it up. Given current market conditions, we are tracking assets by move.
Trading Strategies
Conservative traders should wait to buy a potential dip that bounces off the uptrend line.
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Average traders would short if there is a completed H&S top.
Aggressive traders could now go short, provided they accept the additional risk commensurate with the reward of moving ahead of the rest of the market. A coherent trading plan is a must. Here's an example:
Trade Example – Aggressive Short
Input: 16,400
Stop Loss 16,500
Risk: 100 points
Target: 16,000
Reward: 400 points
Risk Reward Ratio: 1:4
