The Nasdaq is poised for an oversold bounce after a 15% drop, but investors shouldn’t buy it, says Fairlead’s Stockton

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, the United States, March 5, 2020.

  • According to Fairlead Strategies’ Katie Stockton, the Nasdaq 100 is primed for an oversold bounce after its 15% sell-off.
  • “There are signs of downside exhaustion intraday, supporting some temporary relief from negative near-term momentum,” she said.
  • Stockton recommends that investors use any rally as an opportunity to reduce exposure to equities.
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According to technical analyst Katie Stockton of Fairlead Strategies, the Nasdaq 100 will trend towards an oversold bounce in the near term after a rapid 15% drop.

A key area of ​​support for the tech-heavy index is 14,400, which “would be a natural place for an oversold rally to unfold,” it said in a note Monday. The Nasdaq 100 fell nearly 3% to just under 14,000 on Monday.

“There are signs of intraday downside exhaustion this week supporting temporary relief from negative near-term momentum,” Stockton explained, adding that near-term oversold conditions are the most prevalent since October 2020.

Another fuel for a potential rebound is subdued investor sentiment, which suggests “a small bottom will be made earlier this week,” she added. Last week’s AAII investor sentiment survey posted its weakest reading in 10 years.

But rather than buying stocks, investors should use the potential recovery rally as an opportunity to reduce exposure to equities, according to Stockton, who highlighted “widespread collapses” across markets.

“Our long-term indicators continue to deteriorate as the monthly stochastic for the Nasdaq 100 has fallen below 80%, a monthly sell signal (Moving Average Convergence Divergence) has been generated by the Russell 2000 and a possible breakout in the VIX,” Stockton explained.

The VIX, also known as Wall Street’s fear meter, has more than doubled in 2022 to peak at 38 on Monday.

All of this points to a more volatile trading environment for stocks in 2022, similar to the environment seen in 2018, according to Stockton. Volatility was largely absent from the stock market in 2021, with the S&P 500 declining in a year that ended with a 27% gain of only 5%.

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