Bearish trend for Nasdaq still intact despite recent post-Santa rally

THE tech-heavy index Nasdaq Composite ended 2018 down 3.88 per cent for the year. It is the worst annual performance since 2008 and a reversal from the 28.2 per cent increase in 2017. The unsettling Sino-US trade dispute, slowdown of major economies and four rounds of interest rate hikes by the US Federal Reserve are factors influencing the decline. Despite closing the year in negative territory, Nasdaq logged many record-high trading days last year and recorded an all-time high of 8,133.30 in August 2018. These were largely fuelled by the stimulus of tax cuts and fiscal policies, as well as robust economic growth in early-2018.

At the start of 2018, the tech stars - FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet of Google), which are among Nasdaq's top 10 securities by market capitalisation, were driving forces powering the index. But the story turned sour when online privacy scandals spread like wildfire in the second half of 2018. The tax-cut-fuelled US$1 trillion record-high share buyback last year did haul the index back to an all-time high in the third quarter, but the impact faded quickly and wiped out the gains.

Viewing the index on a weekly candle stick chart, the sign of bleeding is clear in the last quarter with a bunch of red candles. The index shed 15 per cent in that quarter alone. Fundamentally, the stimulus powered earnings growth is expected to slow down further in 2019 despite the experience of a near half-a-century low unemployment rate. Due to the rate hikes, trade war uncertainties and slower economic growth, the index is facing more headwinds in the coming months.

Short-term view

However, applying a Stochastic Oscillator, which is a commonly used momentum indicator and also a leading indicator (at 9, 3, 3 level), shows that the Nasdaq Index in the daily chart has just reversed from an oversold position and is still heading north towards the upper band of the indicator - the overbought region. This denotes a possibility that there are still marginal legs to the already late year-end rally. But the ascension could be capped by a shorter-term resistance, the 20-day Simple Moving Average (MA) line. Should the index manage to break through 20MA, it faces a stronger resistance at the 6,800 point.

Medium-term view

The index first traded below 200-day MA in October 2018 and has been residing below the line since then. This is a signal widely read as bearish for the stock market. Three attempts to break the 200MA resistance were not successful although one of the attempts had briefly broken the line for a few trading days but was pulled back into bearish territory. Despite the post-Christmas rally, the index is still trading far below the 200MA line and is certainly facing an uphill task climbing back to the previous high. In addition, the Death Cross of MA in which 50MA crosses below 200MA, occurred in end-November, implying an inveterate signal of further downside risk.

Long-term view

With a longer-term investment horizon, investors may tap the inflationary growth of the global economy and the vast opportunities offered in the evolution of technology. Since the tech index commenced in 1971 at 100 points, it has gained more than sixty-five folds (excluding dividends). Although past performance is not indicative of future results, longer-term investors with a more resilient portfolio and healthy cash flow are more often able to sail through the storms.

In summary, the Nasdaq has technically been trading in a downward trend since August 2018, with the support line found near the 6,200 level. Despite the recent post-Santa rally, the bearish trend is still intact. Facing immediate resistance at the 6,800 point, followed by the 50MA and 100MA lines, the index is unlikely in the near term to reverse its course. However, this provides an opportunity for longer-term investors to rebalance, and to dollar-cost-average out their portfolio.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.