Chart Of The Day: Nasdaq Still Vulnerable Despite Recovery 

The sharp recovery in the second half of Thursday’s session saw the major US indices and European futures reclaim big chunks of their earlier losses, raising hopes that the markets have reached at least a near-term low. However, the moves appeared to have been driven by short covering since there was no news to trigger the recovery. Consequently, I reckon the markets will resume lower over the next few sessions given the ongoing bearish macro backdrop and momentum. 

Thursday’s recovery helped to create hammer candles on the daily charts of the Nasdaq, S&P 500 and Dow Jones.

While hammer candles typically precede follow-up gains, this is not always the case. What’s more important than the shape of the candles is the directional bias of the market. Whereas previously it was all about dip-buying, this year the better trades have been selling into the rips given the higher time frame lower lows and the faster drops than recovery phases. So, while a bit of bullish follow-through may be observed today, watch out for signs of bull traps on the lower time frames. For example, a move above and then a quick drop back below Thursday’s high could be the bearish signal I am referring to. 

The bulls meanwhile would want to see some acceptance above Thursday’s range. If that is observed, then we see may a more pronounced recovery towards the next zone of resistance shown on the chart, around 12820, before the market decides on the next move. 

On a macro level, it is all about the US jobs report today as the market tries to figure out how aggressive or otherwise it should be on its assessment of US interest rate hikes. After Powell’s speech last Friday, the market is betting that another 75-basis point hike is on the table in a couple of weeks’ time. The Fed has admitted that it wants to bring down inflation even at the cost of triggering a recession by continuing with its aggressive policy. Thus, today’s nonfarm payrolls report is probably not going to materially change that view. But paradoxically, a very strong report will just help to cement expectations that the Fed will indeed hike by 75 basis points at its next meeting, which should keep the US dollar and bond yields underpinned, and zero- and low-yielding assets such as gold and Nasdaq undermined. What’s more, concerns over the health of the Chinese economy have not been lifted and this will also help to keep a ceiling on the equity markets.

Disclaimer: The author currently does not own any of the instruments mentioned in this article.