The shifting landscape of monetary policy is increasingly influencing the US stock market, particularly the technology-heavy Nasdaq 100 index. As discussed in recent analyses, the Federal Reserve (Fed) appears to be pivoting from an accommodative stance, often described as “dovish,” toward a more normalized posture. This change has generated concerns regarding a potential halt to the seasonal market rally typically expected around this time of year, often dubbed the “Santa Rally.”
Market sentiments have become considerably unsettled following the latest Fed communications, particularly the release of its projected “dot plot” and remarks made by Chair Jerome Powell. The central bank hinted at the possibility of fewer interest rate cuts in 2025, attributing this outlook to the risk of resurgent inflation—a phenomenon many market participants had thought was receding. Such a premonition, combined with implications from the incoming administration’s policies, notably the “America First” agenda, has raised uncertainties concerning the broader economic landscape.
Despite initially reaching an all-time high of 22,133 on December 16, 2024, the Nasdaq 100’s trajectory has faced significant headwinds. Following the Fed’s announcement, the index registered a sharp decline of 4% over just two days, illustrating a stark volatility that could point to a broader market correction. The Nasdaq 100, typically more volatile compared to other indices such as the S&P 500 or Dow Jones, has faced increased selling pressure, making it the second worst performer among the major US indices during this turbulent time.
Technical analysis reveals several concerning trends within the Nasdaq 100. Notably, the percentage of constituent stocks trading above their respective moving averages has significantly decreased since the beginning of December 2024. At a worrying low of 9.9% trading above the 20-day moving average and just 33.7% above the 50-day moving average, these indicators suggest dwindling momentum. This divergence—whereby the index itself continues to post highs while the breadth of stocks supporting those increases diminishes—often suggests vulnerability within the market, raising flags for potential corrections.
Additionally, a critical technical observation has been made regarding the position of the Nasdaq 100 relative to its long-term secular ascending channel, a trend established since the market lows in March 2020. The price action over the past several days indicates a troubling reintegration below the upper boundary of this channel, suggesting that the bullish optimism seen earlier this month may have been misplaced. The index’s decline of 5.5% in the days following its peak gives credence to the argument that a correction may be imminent.
Market analysts are keenly watching the 20,790 level as an essential support zone for the Nasdaq 100. As the index approaches this threshold, the situation for investors grows increasingly precarious. Current readings from momentum indicators, such as the Relative Strength Index (RSI), point toward a potential breach of this support. A daily close below this level could initiate a ripple effect, triggering a broader correction that exposes even lower support levels around 19,840 and 18,310.
In the absence of substantive positive developments, continued weakness could lead to cascading sell-offs, as investor sentiment swings toward caution. The technical landscape indicates that the current support level may not hold strong, particularly given that fewer stocks within the index have reached new 52-week highs since mid-November. The concurrent increase of new lows, coupled with the decline in new highs, further complicates the outlook for the months ahead.
Despite these bearish signals, the market is never devoid of opportunities for recovery. Should there be a breakout above the identified pivotal resistance zone of 22,470 to 22,980, the narrative may shift, enabling a continuation of the upward sequence towards potential higher targets of 23,980 to 25,080. A failure to achieve such a breakout amidst the current challenges, however, would likely solidify the ongoing corrective trend in the Nasdaq 100.
The confluence of Fed policy, market sentiment, and technical indicators paints a picture of caution for investors in the Nasdaq 100. As the year draws to a close, market participants should remain vigilant, cognizant of key support and resistance levels, while weighing the implications of policy shifts on their investment strategies. The upcoming trading sessions are poised to be critical in determining whether the anticipated Santa Rally will bear fruit or succumb to the prevailing headwinds of economic uncertainty.
Leave a Reply