By Mihir Gupta, Ameya Joshi, Sukrith Kumar (UCL) and Filippo Palacino (ETH Zurich)
Originally created by the National Association of Securities Dealers (NASD) to help improve the speed of trading via a computerized system, the NASDAQ is one of the largest stock and securities exchanges globally, only second to the New York Stock Exchange (NYSE) in market capitalization. Unlike other exchanges, NASDAQ is one of the few that has no physical trading floor, with all their OTC (over the counter) stocks traded through the computerized network, attracting some of the largest blue-chip technology companies to trade on this exchange.
The technology and dot com boom over the last two decades has been exemplified by the movement of the NASDAQ index. The main index, that is referred to as the NASDAQ, is in fact the NASDAQ Composite, which is a market index fund following the general trends of the NASDAQ. The NASDAQ Composite is made up of over 30,000 stocks, but the main index is the NASDAQ-100, which includes the top 100 stocks in the exchange – companies such as Apple and Microsoft.
The top 10 companies with the greatest weighting, hence largest market capitalization, in the NASDAQ index, are as follows:
Table 1: Top 10 companies with the maximum weightage on NASDAQ-100
Forecasting Analysis - NASDAQ
Graph 1: Forecast Plot for NASDAQ (R-Studio)
Graph 2: ACF and PACF Plot for NASDAQ (R-Studio)
We used the statistical programming interface RStudio to algorithmically forecast NASDAQ’s price movement. Our customised model indicates some buying pressure in the immediate future (the x-axis represents time in days, while the y-axis represents stock price) however, this is not expected to be very high. The 95% and 80% confidence interval (the dark and light grey areas) indicate that price movement is set to increase in the new two weeks (we have performed a 20 day forecast).
The ACF and PACF plots of the residual values of the model indicate how well the Autoregressive and Moving Average orders we have built the differenced model upon function. As the majority of points lie in between the bounded intervals, we can reasonably believe that the orders are well estimated. Furthermore, the Mean Absolute Percentage Error of the model is 0.87% indicating generally high levels of accuracy in our forecast. However, as not all the points in the ACF and PACF plots lie within the bounded region, it is important to take this forecast with a pinch of salt.
Technical Outlook for the Index - NASDAQ
Support and Resistance Analysis
Graph 3: Support and Resistance Levels for NASDAQ (Investing.com as on 23/10/2020)
As on 23rd October 2020, the NASDAQ Composite closed at 11,548.28, after having gained 0.37% by the end of the trading session. Ever since the index bottomed on 16th March 2020, it witnessed the most distinct V-shaped recovery, compared to all global indices - predominantly because of the heavy weightage of technology related stocks on the index which were driving the trendline upwards. In fact, as it can be seen in Graph 3, it was only in the first week of September that the index witnessed a major correction, that too because of the profit booking in the IT sector.
However ever since, the movement of the index has been extremely volatile with frequent gap-us and gap-downs leaving the index in one sense directionless. In fact, part of this uncertainty is exacerbated by the continuous shooting star and hammer patterns that have been forming up in the index for the past 4 days, showcasing the inability of either the bulls or the bears to garner momentum in the index. Part of this volatility may be attributed to the US Presidential election and part because of the asymmetric movements in terms of the coronavirus cases across the globe which seem to be ticking up once again.
As per our analysis, we believe that the index is trading close to its immediate support level of 11,412 and its immediate resistance level of 11,607 respectively(as shown by the blue rectangles in Graph 3). Furthermore, some of the other crucial levels in addition to the immediate support and resistance levels are 11,820 and 11,964 on the upside (as shown by the orange and by yellow rectangles on the upside respectively in Graph 3) and 11,131; 10,919 and 10,570 on the downside (as shown by the orange, yellow and pink rectangles on the downside respectively in Graph 3).
Graph 4: Fibonacci Levels for NASDAQ (Investing.com as on 23/10/2020)
In fact, the strength of these levels is further exemplified by drawing the Fibonacci Levels on a downward basis, commencing from the highest point of the candlestick formed on 2nd September, 2020 and extending it up till the lowest point of the candlestick on 8th September, 2020. As it can be seen in Graph 4, 11,460 and 11,605 are indeed the 0.5 and 0.618 retracement levels. In fact, even in case of levels other than the immediate support and resistance, we witness that the strength of the 11,820 level is supported by the fact that indeed 11,812 is the 0.786 retracement level on the upside and subsequently the strength of the 11,131 level on the downside is supported by the fact that indeed 11,316 is the 0.236 retracement level on the downside.
Before we move onto the next section, there is one crucial point that we will like to highlight with respect to the recent candlestick formations. That is, ever since the index witnessed bulk selling on 19th September, 2020, all the subsequent candles have been forming within that big red candle, i.e. the index has not closed either above or below the opening or closing of the candle formed on 19th September 2020. Resultantly, this observation in itself is crucial because according to candlestick analysis, the index can witness a significant move towards the upside or the downside depending on which bound is broken first. Resultantly, in light of this point - the continuous hammers formed on 22nd and 23rd October is testament to the inability of the bears to break the lower bound. Hence, it is this resistance that makes us believe that the bulls might just be taking over in order to drive the index upwards.
Trend and Pattern Analysis
Graph 5: Trend Analysis for NASDAQ (Investing.com as on 23/10/2020)
As mentioned at the beginning of the technical outlook section of the report, the V-shaped recovery that the NASDAQ Composite witnessed was the most prominent amongst all global indices. This movement of the index is further highlighted by the black line trend lines that have been drawn in Graph 5. As it can be seen, having bottomed out on 16th March 2020, the index caught hold of its dynamic upward trendline and continued to maintain it till 3rd September, 2020. In fact, this movement was further complemented by a distinct higher high higher low formation and minor corrections along the way.
However, it was on 4th September, 2020 that the index breached its trendline and broke down. Predominantly, because of the massive correction in technology stocks. Ever since the index formed a falling wedge (as shown by the pink lines in Graph 5). Nonetheless, this period of correction was short lived because on 25th September, 2020, the index opened with an enormous gap up on 28th September 2020, breaking out of its falling wedge. Subsequently, a recent analysis of the index suggests that it is back in a parallel rising corridor, forming higher highs and higher lows (as shown by the blue lines in Graph 5).
Graph 6: Inverted Head and Shoulder and Ascending Triangle Formation in NASDAQ (Investing.com as on 23/10/2020)
As far as the pattern analysis for the index is concerned about, we believe that the recent signals lie in conjunction with our own opinion of the index witnessing a move towards the upside in the coming weeks. To further elaborate on this point, the index witnessed a distinct breakout between 8th - 10th September 2020, which resulted from an inverse Head and Shoulder pattern formation (as shown in Graph 6). In fact, analysis of the larger picture suggests that there is a distinct ascending triangle that seems to be in the process of formation. In light of that observation, given that the index has already witnessed a move toward the lower bound of the triangle (as shown by the blue line in Graph 6), we believe that the index may give a move on the upside towards the resistance level (as highlighted by the orange rectangle in Graph 6).
Graph 7: Bullish pennant and Cup & Handle Formation in NASDAQ (Investing.com as on 23/10/2020)
Furthermore, as per our observations we also believe that in addition to the Ascending Triangle formation, there is a bullish pennant and Cup and Handle formation being formed. In fact, if these patterns were to move their desired results, then the completion of the Cup and Handle formation is going to intersect with the breakout from the bullish pennant which in our opinion is an extremely strong signal for the bulls to have entered the index in order to dictate momentum.
Moving Average and DMI Analysis
Graph 8: 20-days and 5-days Moving Average and DMI Analysis for NASDAQ (Investing.com as on 23/10/2020)
We continue to utilise the 20-days and 5-days Simple Moving Averages in order to observe significant crossovers that may have occurred in the recent trading sessions. As it remains, the positive crossover that was established on 30th September 2020 is still intact. In fact, the recent correction has meant that the 20-days MA has also been tested. Resultantly, we are of the opinion that unless a panic selling phase was to come in the market, the index will continue to trail the positive crossover on the upside.
Under this analysis section, we have also included the analysis of the Directional Movement Index, which gives us an into the buying and selling pressures in the index. Although one would rightly point out that the current crossover (i.e. the -DI line overtaking the +DI Line) isn't necessarily in line with our current predictions, there is still a major reason why we have included this indicator. That is that although the selling pressure seems to be greater than the buying pressures, the distance between the two lines is almost negligible. Consequently, we believe that a single session characterised with strong buying pressure and this gap, and we will have a positive crossover.
Bollinger Band Analysis
Graph 9: Bollinger Band Analysis for NASDAQ (Investing.com as on 23/10/2020)
As highlighted in our earlier reports as well, Bollinger Band analysis has been a vital part of our analysis strategy, primarily because of its ability to provide us with a range for the upper as well as lower limits of candlestick movements at the same time. Resultantly, even with respect to the movement of the candlesticks of NASDAQ Composite within the band, the recent breach of the +2 SD bound by two continuous green candles (as highlighted by the yellow box in Graph 9) on 9th and 12th September 2020 may be interpreted as an extremely strong signal for a move towards the upside in the coming days.
In fact, in continuation, a crucial observation that we would like to make note of is that although it is true that the index has witnessed some correction, it might just have been the case that this was the usual retest of the breakout level. We say so because the candlestick has yet not breached the 20-days MA (as highlighted by the red line in Graph 9) and till the time, this line is severely breached, we believe that in the given circumstances, the index will continue to trail on the upside.
RSI and Stochastic Analysis
Graph 10: Stochastic and RSI Analysis for NASDAQ (Investing.com as on 23/10/2020)
We would like to end our report with the analysis of the Stochastic Oscillator and Relative Strength Index (RSI) of the NASDAQ Composite for a 14-day period. As for the RSI, we observe that the movement of the indicator has been in the neutral zone since the period of correction in September. Nonetheless, there still remains a pattern embedded within the movement of the RSI of the index. This is that the 51.51 level has been acting as crucial support for the index (as shown by the black line in the upper handle of Graph 10).
As a matter of fact, historical analysis of the RSI suggests that hardly has the index breached this level and most of the time witnessed a movement towards the upside after having tested it. The reason why we highlight this point is because only very recently, did the index test this level which makes us believe that our expectation of witnessing a move on the upside is well intact.
Finally, as far as observations from the Stochastic Oscillator are concerned about, we conclude there are no decisive red flags that are visible at the moment. However, an observation that may come in handy is that only very recently did the indicator lines enter back into the neutral zone, after having hovered in the overbought zone. This, in one sense may come about to be important during next week’s sessions as it provides the bulls with some space to dictate the market while being in the neutral zone.