A simple reversal trade setup on the Nasdaq. The tech index confirmed a double bottom pattern breakout on November 11th, the day after an epic rally which is among the best days of 2022.
The breakout has not seen any momentum as different Fed heads have come out saying different things, and some geopolitical tensions. The markets are still determining if the Fed will slow down on rate hikes and if inflation will slow down. These two things are a topic for a different post. Let's talk about the chart we see.
The Nasdaq saw buyers jump in right at the retest zone of the breakout pattern. This is just typical of what we expect from a breakout trade. Traders can either enter now and place their stops below the breakout zone, or await for the recent highs of 11,850 to be taken out before jumping in long. The latter is the more safer way to play and increases your probability of success as it confirms a higher low. Since trading is a business of probabilities, this is a very prudent way to play the trade.
There are also TWO other charts which are pointing at higher markets:
First, the US 10 year yield is the chart you must be watching to determine where stocks are going. We have a reversal pattern on this, and as yields drop, stock markets rise. Of course, a move into bonds needs to be assessed properly. We have seen a case where the 10 year dropped because of fear (the Poland-Ukraine missile issue). But generally, as yields drop, it is the market pricing in the Fed being less hawkish and even pausing rate hikes soon.
Secondly, the US Dollar Index (DXY) heading lower is a positive sign for markets for the same reason as above. A less hawkish Fed. The DXY also broke down and we are awaiting our first lower high.
Both of these continuing lower means a higher chance that stock markets, and yes the Nasdaq, continue their reversal recovery. But of course, the Fed in December could put a major halt to this move.
The breakout has not seen any momentum as different Fed heads have come out saying different things, and some geopolitical tensions. The markets are still determining if the Fed will slow down on rate hikes and if inflation will slow down. These two things are a topic for a different post. Let's talk about the chart we see.
The Nasdaq saw buyers jump in right at the retest zone of the breakout pattern. This is just typical of what we expect from a breakout trade. Traders can either enter now and place their stops below the breakout zone, or await for the recent highs of 11,850 to be taken out before jumping in long. The latter is the more safer way to play and increases your probability of success as it confirms a higher low. Since trading is a business of probabilities, this is a very prudent way to play the trade.
There are also TWO other charts which are pointing at higher markets:
First, the US 10 year yield is the chart you must be watching to determine where stocks are going. We have a reversal pattern on this, and as yields drop, stock markets rise. Of course, a move into bonds needs to be assessed properly. We have seen a case where the 10 year dropped because of fear (the Poland-Ukraine missile issue). But generally, as yields drop, it is the market pricing in the Fed being less hawkish and even pausing rate hikes soon.
Secondly, the US Dollar Index (DXY) heading lower is a positive sign for markets for the same reason as above. A less hawkish Fed. The DXY also broke down and we are awaiting our first lower high.
Both of these continuing lower means a higher chance that stock markets, and yes the Nasdaq, continue their reversal recovery. But of course, the Fed in December could put a major halt to this move.