Nasdaq 100: Shrinking Market Breadth Concerns Bullish Investors

The price action of the Nasdaq 100 has reached the lower limit of a major resistance zone at 18,435/620. This is an update from our previous analysis titled "Nasdaq 100 Technical: Bulls rescued by Nvidia (again)" published on February 23rd, which highlighted Nvidia's significant contribution to Nasdaq's gains. 

Since then, we have seen a surge in the US Nas 100 Index towards these resistance levels and even surpassing them to reach another all-time high of 18,497 last Thursday. The current uptrend phases remain strong for major US benchmark stock indices; S&P500, Nasdaq100 and Dow Jones Industrial Average but over-concentration risk from Nvidia poses a threat. 

As Q1 ends soon with only one more day left, year-to-date performances look set to end positively led by S&P 500 (+11.03%) and closely followed by Nasdaq 100 (+10.50%). However, it’s worth noting that this bullish run can be attributed largely to Nvidia which has rocketed its year-to-date return up +87.37%. 

This spectacular performance makes Nvidia the third-ranked component stock behind Apple and Microsoft contributing almost half (42%) of S&P500's returns so far this year and over half (55%) for Nasdaq100 due to its market capitalization weighting calculation. 

Such heavy reliance on one company increases vulnerability should macro factors deteriorate such as fewer interest rate cuts than priced in currently according to CME FedWatch Tool or increased geopolitical risk premium or currency war if PBoC attempts weakening Chinese yuan against USD. 

Adding fuel to fire are deteriorating market breadth indicators for Nasaq100 where fewer stocks within Nasdaq Composite are making fresh highs compared to new lows since January end. Moreover, the percentage of component stocks holding above their respective moving averages has also fallen during the same period indicating lacklustre momentum ahead. 

From technical perspective too bearish divergence conditions on Nasdaq100 are evident making a multi-week corrective decline imminent. Price action has hit a major resistance zone and formed a bearish "Ascending Wedge" configuration coupled with waning momentum as indicated by daily RSI indicator. 

A break below 17,840 support may trigger the start of this potential correction with next medium-term support seen at 17,160/16,930. On a shorter term horizon price action is sandwiched between 18,470 and 18,110 providing key levels to watch for both bulls and bears. 

In summary, while the current uptrend remains intact, over-reliance on Nvidia for gains and deteriorating market breadth does not bode well for future price action in Nasdaq100 hence caution is warranted going forward. 

As always it’s important to note that content provided here is only for general information purposes and not investment advice or solution to buy or sell securities. Opinions expressed are authors' own; not necessarily those of OANDA Business Information & Services Inc., its affiliates or subsidiaries.