The financial markets, especially the tech-heavy Nasdaq 100, are in a state of uncertainty as we approach the end of the year. With various economic indicators signaling a potential shift in monetary policy, investors need to stay vigilant. Recent developments suggest that the elusive year-end “Santa Rally” might be in jeopardy due to the Federal Reserve’s pivot from its previously dovish stance toward a normalization of interest rates.
This year’s festive market period is at risk, owing to a shift in the Federal Reserve’s approach to monetary policy. The prospect of fewer interest rate cuts in the coming years—particularly in 2025—source of concern for investors. Fed Chair Jerome Powell’s recent comments, combined with the latest “dot plot” concerning interest rate forecasts, indicate a more hawkish stance in response to rising inflation risks. This reverberation through financial markets could quash the seasonal uptick that many traders are banking on.
This was illustrated dramatically when the Nasdaq 100 reached a peak of 22,133 on December 16, only to see a decline of approximately 4% the following day. It marks one of the swift market reactions to a release of crucial monetary policy information, causing an unsettling ripple across indices, including the Russell 2000 and the S&P 500.
A closer examination of market breadth reveals troubling signs for the Nasdaq 100. From the beginning of December, the percentage of Nasdaq 100 component stocks trading above their 20-day and 50-day moving averages has dropped sharply. Currently, a mere 9.9% of these stocks surpass their 20-day moving averages, with only 33.7% above the 50-day moving average. This decline signals weakening momentum, suggesting that the market may not sustain its previous highs.
Additional technical indicators further corroborate this bearish sentiment. The Nasdaq 100 is now teetering just above the crucial support mark of 20,790—a level that has become pivotal as it could dictate the market’s trajectory over the coming weeks. A failure to maintain above this threshold may usher in a more significant corrective phase, with projections indicating potential support levels as low as 19,840 and 18,310.
As the market grapples with declining momentum, traders are advised to keep a close eye on the 20,790 support level. The importance of this key point cannot be overstated; it has the potential to act as a fulcrum for the Nasdaq 100’s performance in the near term. The recent price action suggests that the market has lost some of its upward momentum, having dipped below the upper boundary of a long-term ascending channel it had previously maintained since March 2020.
Moreover, the daily Relative Strength Index (RSI) has broken below significant support levels, indicating an increase in bearish momentum. Such indicators often point to a weakening market, where sentiment could shift rapidly, leading to a more pronounced decline in the absence of controlling factors.
While the bearish signs loom large, the market could still reverse course. A break above the established resistance levels around 22,470 to 22,980 could serve as a catalyst for renewed bullish sentiment, potentially flipping the script on the current outlook. Should this occur, traders may look toward higher resistance levels at 23,980, 24,440, and even 25,080.
However, until such a breakout occurs, vigilance is paramount for those invested in the Nasdaq 100 and other tech-heavy indices. External factors, particularly the Federal Reserve’s evolving monetary policy and more pronounced economic data—including inflation rates and job growth in the upcoming months—will play pivotal roles in shaping market sentiment.
The convergence of waning momentum, declining market breadth, and potential shifts in monetary policy creates a precarious environment for Nasdaq 100 investors. As traders brace for the potential consequences of a bearish phase, the importance of monitoring key technical indicators and market sentiment cannot be overstated. The upcoming weeks will be crucial in determining whether this year’s hoped-for “Santa Rally” materializes or fades amid a more cautious investment climate.