Nasdaq 100 analysis: Stocks extend rally on signs Fed winning inflation battle

• Nasdaq 100 analysis: PPI delivers more signs inflation is on downward trajectory
• US data recap: PPI misses but NY manufacturing index and retail sales beat
• Nasdaq 100 technical analysis: Index at ‘overbought’ levels as it tests summer high

We are now in mid-November and US stock markets are enjoying one of their best phases this year, all thanks to optimism that interest rates will start to come down in the not-too-distant future now that inflation is on a downward trajectory. The markets do appear a little overbought though after a sharp three-week rally, especially the tech-heavy Nasdaq, so there is a risk of a short-term pullback. But with so many resistance levels having broken down in this melt-up, any potential short-term weakness should not be confused with a bearish reversal, unless the charts tell us otherwise and/or the Fed starts to push back against rate cut expectations forcefully.

Earlier, US index futures were up across the board with Nasdaq futures extending its sharp 3-week rally to test the July high, when it had reached its highest point since January 2022. The latest gains were in response to fresh data from the US showing further signs of abating inflationary pressures as prices paid to US producers unexpectedly declined in October by the most since April 2020. However, once the cash markets opened, we saw the Nasdaq come off their earlier highs, although the Russel and Dow were still near their earlier high.

PPI delivers more signs inflation is on downward trajectory

Today’s main data release was PPI, which fell 0.5% m/m to provide us with the latest sign that the Fed is winning the inflation battle. This followed a soft US CPI print from the day before, which had triggered massive moves across financial markets. A sharper-than-expected inflation decline in the UK this morning also helped to fuel a rally in the FTSE. We also had some signs that China’s recovery is starting to take hold while the slightly stronger-than-expected US retail sales and Empire Manufacturing Index shows the world’s largest economy is continuing to defy recession expectations.

US data recap: PPI misses but NY manufacturing index and retail sales beat

In case you missed it, here’s a summary of today’s US data releases:

• PPI came in at -0.5% m/m vs. 0.1% expected and 0.4% last. On a year-over-year basis, PPI cooled to 1.3% compared to 1.9% expected, falling sharply from 2.2% the month before.

   

• Core PPI was flat, missing expectations of +0.3%; on a y-o-y basis, core PPI was 2.4% vs. 2.7% expected and 2.7% last.

   

• The Empire State Manufacturing Index beat at 9.1 vs. -3.0 eyed and -4.6 last.

   

• US October retail sales printed -0.1% vs -0.3% expected, while prior was revised to +0.9% from +0.7% initially report. Ex-autos, sales were +0.1% versus 0.0% expected.

Nasdaq 100 analysis: Technical levels to watch

From a technical point of view, the sharp 3-week rally means the Nasdaq is now at ‘overbought’ levels, as indicated by the momentum indicator RSI, in the sub-chart, moving above the 70 threshold.

Interestingly, the RSI ‘overbought’ threshold has been reached with the underlying Nasdaq index testing its summer high of around 15933. The potential for the index to form a double top or a false break reversal pattern is therefore there. Even if we don’t see a major bearish reversal there, a bit small correction cannot be ruled out at this stage.

The underlying trend is bullish, so we would expect dips back to major support levels to hold. There are two key support levels to watch, one at 15533, the high from Monday, followed by 15339, the high from October. Tuesday’s high at 15850 is also a minor support level that needs to be monitored.

For now, there are only modest signs of potential trouble for the bulls. Only if and when we see a potential drop below the levels mentioned will things look bearish again.

With everything mentioned, the bulls may wish to proceed with extra care from here, after enjoying a sharp three-week rally. The bears meanwhile will need to await further price action and a clear indication of a top before pouncing again.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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