We have seen time and again that the US markets have a tendency to bounce back strongly after a sizeable drop, and that’s precisely what happened again on Wednesday following the CPI-related dump the day before. Index futures bounced back alongside European markets and bonds, before rising further once Wall Street opened to close near their highs. At the time of writing in early European session on Thursday, US index futures had risen further, tracking firmer European market. Germany’s DAX index reached a new record high, despite cautious remarks from ECB President Christine Lagarde and mixed earnings reports. 

Sentiment improves following Tuesday’s selling

Sentiment improved as US tech giants rebounded on Wednesday, following the previous day's sell-off prompted by CPI-related concerns. The swift improvement in sentiment helped boost some of the commodity-linked currencies against the dollar. 

But for how much longer can the rally sustain itself? Are we going to see weakness creep into the markets soon, and if so, what technical factors will give the bears the green lights?

Correction risk is on the rise, but so far bulls clinging on

This year has seen the US indices hit repeated records highs despite consistent pushback against expectations of an early rate cut by the Fed, thanks to stronger economic data and a rather slow disinflation process. Mostly stronger earnings and the AI optimism has been behind the rally, but with most of the Magnificent 7 stocks reaching extremely expensive levels, there is always the danger of a rug pull, soon. Has that process already started in light of Tuesday’s sell-off? Well, it looked that way on Tuesday but judging by Wednesday’s price action, it was back to normal conditions with the dip buyers yet again stepping in to defend the market. The million-dollar question is when the markets will top. To get an idea, we will need to see some real commitment from the bears before one can conclude that the strong bullish trend has at least temporarily ended, something which hasn’t happened so far this year. But with most earnings out of the way now, the upside may be limited without a correction of some sort to remove some froth. So, I reckon the risk of a correction is quite high. We just need to see that trigger first.

Magnificent 7 need a rest, but confirmation of a reversal needed

From a macro perspective, we have lots of data coming up to stimulate investor enthusiasm today and tomorrow, but the focus will be on whether yields will bounce back and what this may mean for technology stocks in particular. The cluster of technology equities referred to as the "Magnificent Seven," which also includes Nvidia stock (now worth more than Amazon and Alphabet), presently constitute approximately 30% of the S&P 500 index. They contributed to more than three-fifths of the S&P 500's overall returns last year. Despite expectations of market diversification in 2024, the opposite has materialised, with an even greater concentration of market leadership. These specific stocks have been the primary drivers behind over 80% of the index's gains this year. It would seem logical for investors to consider capitalizing on profits from these stocks, after Tuesday’s drop highlighted the obvious risk that the market can go down as well as up. Additionally, a rotation into alternative sectors may contribute to a potential correction in the technology sector, impacting the Nasdaq 100 and the S&P 500 index.

After a hot inflation report, more data is on the way

After a hot CPI print on Tuesday and the lack of any major news on Wednesday, the focus is now turning to this week’s other data releases. Up next, we have retail sales, industrial production, jobless claims, and Manufacturing indices from Philadelphia and New York, all scheduled for release later on Thursday. A day later, on Friday, we will have PPI, building permits, and UoM Consumer Sentiment. 

Nasdaq analysis: Technical levels and factors to watch

Following Tuesday’s sell-off, the Nasdaq index bounced back all the way from 17473 to around 17835 area where it has encountered some resistance. Support came from the bullish trend line that has been in place since October.

The 17835 level was the last support zone after the index had rallied to hit a new all-time high on Monday. It needs to hold as resistance if the sellers have any chance of pushing the markets lower. Even if the market does head a bit lower from here, the bears will need to break that bullish trend line. A potential break of the trend line could pave the way for further technical selling, so watch out for that. Below the trend line, there are no obvious short-term support levels to watch until the December’s high at 16970. 

However, if the bears do not show up, a move to a new high above Monday’s peak of 18044 could be the outcome. 

(Click on image to enlarge)

Source: TradingView.com

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