Squeeze Fuel Ready, Should Tech Bulls Deliver

After a three-week, 12-percent decline, the Nasdaq 100 (NDX) staged a hammer reversal last Friday. In the right circumstances, there is room to rally on the daily. This can act as a self-fulfilling prophecy should tech bulls force zealous shorts to cover.

Last Friday, after dropping 12 percent intraday from its all-time high set on February 16, the Nasdaq 100 reversed with a daily hammer. The decline preceded a 105-percent surge from the low of last March – that is, in less than 11 months.

Even before the index retreated after the February high, subtle signs of distribution began to show up this year. Bulls were having difficulty hanging on to the gains. On the monthly, January formed a long-legged doji and February a shooting star.

The three-week decline has cost the index rising trend line from the aforementioned low of last March (Chart 1). Ditto with the 50-day moving average.

The consolation for tech bulls is that bids showed up last Friday slightly under the early-September high of 12430s, or right at the mid-October high of 12200s. Tuesday’s four-percent jump put the index right near short-term resistance at 12760s. The daily remains oversold. A takeout of 12760s opens the door to a test of the 50-day at 13145.89.

It is too soon to say if last Friday’s reversal is for real, because, of the major US equity indices, the Nasdaq 100 is the one to sustain the most technical damage. It remains under both the March trend line and the 50-day. But if the longs can regroup, they can at least benefit from a potential reversal of the positions accumulated by the shorts.

In the futures market, non-commercials as of Tuesday last week were sitting on 23,493 net shorts in Nasdaq 100 index (mini) futures. This was up from 5,388 contracts in the week before. These traders switched to net short after remaining net long for 11 straight weeks (Chart 2).

It is worth pointing out that in the week to September 22 last year, non-commercials were net short 134,311 contracts, a position so massive that once they began to cover it put sustained upward pressure on the cash. The current holdings are nowhere near that.

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