Last Friday, there was a major bearish divergence in US markets. Just after traders cheered a new all-time high for the Dow Jones, the NASDAQ fell off a cliff to put a big crack in the bull market.

Worse, the NASDAQ has continued to fall into the new trading week, indicating this was not a one-day wonder and could be a sign of trouble ahead for world stock markets.  


Since the November election, US markets have been trending upward. Through the initial rally phase and the March consolidation, NASDAQ's performance was similar to the Dow and S&P 500. Since Mid-April, however, the NASDAQ has outperformed its peers, indicating a concentration of the advance into big-cap technology stocks. This appeared concerning because technology tends to outperform at the end of a bull market.

On Friday, the NASDAQ turned sharply downward, breaking the 5,800 level and an uptrend support line which has since become resistance. Into the new trading week, old support has become new resistance, and the RSI has broken under 50, confirming the breakdown and a shift to distribution.

Our comparative chart above shows that there is a lot of air between the performance of the NDAQ relative to the US 30 and US SPX 500, leaving the NDAQ particularly vulnerable to a correction.

An initial support zone appears between 5,580 and 5,602, between a 23% Fibonacci retracement and the 50-day average. A break of that zone would signal the start of a new downleg, with next support possible near 5,385, then 5,225, the 38% and 50% retracement levels.  


To date, the post-election honeymoon rally in US stocks has been really powerful, but the break in the NASDAQ indicates sentiment may be changing. The index break has coincided with breakdowns for a number of the sector leaders including Amazon (which is back under $1,000) and Apple. One could say that traders have started to take profits in the stocks where the most profits have come lately, and that this is a correction. However, when the generals of a sector are being taken out and shot, often the troops aren’t far behind.

With earnings season now over, very high expectations have been built into share prices heading into a time where news could be more volatile. This week’s US Federal Reserve meeting could have an impact on sentiment. After weeks of declines that helped stocks, the US dollar has been starting to rebound on anticipation of a rate hike this week. With traders leaning dovish lately amid slowing economic data and political turmoil, if the Fed comes in hawkish and boosts the dollar,  or gives any sign the easy money liquidity party could be winding down (like running down its balance sheet) it could become a headwind for US stocks in general and momentum plays in particular.

Traders should note that although we haven’t had a seasonal spring correction in US markets, we’re still well into the more volatile and weaker time of the year for stocks, which runs from May through October. We’re also still in the historically weaker first half of the presidential cycle, and with the US heading for a big budget battle, stocks could be in for a wild ride this summer.


CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets Canada Inc. is a member of the Investment Industry Regulatory Organization of Canada and Member-Canadian Investor Protection Fund / Membre-Fonds canadien de protection des épargnants. CFDs are distributed in Canada by CMC Markets Canada Inc. dealer and agent of CMC Markets UK plc. Trading CFDs and FX involves a high degree of risk and investors should be prepared for the risk of losing their entire investment and losing further amounts. CMC Markets is an execution only dealer and does not provide investment advice or recommendations regarding the purchase or sale of any securities.

CFD and FX trading with CMC Markets is only available in jurisdictions in which CMC is registered or exempt from registration, and in Alberta is available to Accredited Investors only. CMC Markets neither solicits nor accepts business or accounts from residents of the United States of America. 

CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.