Strong US treasury yields put the Nasdaq on the back foot again!
Technology and growth stocks were hammered by a broad selloff that hit Cathie Wood's flagship fund ARK Invest as investors moved away from tech shares amid the sharp rise in Treasury yields.
US10 year yields pushed higher to 1.550 yesterday, a level not seen since June 2021 and one from which the Hawkish FOMC quickly reversed. Looking at the chart above the day's close was below the previous swing high which had already recoiled from a level of old support which is now acting as resistance. There is a chance that the US treasury yields come off from this level, but if they don’t the equities markets and especially anything related to tech could see a deeper correction.
The ARK Innovation ETF, whose assets were $21.4 billion a week ago, fell 4.2% on Tuesday, according to Refinitiv. S&P 500 fell by 2%, which was its biggest decline since May, and the tech-heavy Nasdaq shed 2.8%, which was the largest drop since March.
As a result of a rise in Treasury yields after last week's Federal Reserve open market meeting, the ARK fund has lost more ground in recent days, due to a drop in technology stocks and growth stocks. The 10-year yield is moving by such a significant amount in such a short period of time that it tends to coincide with a market sell-off of some magnitude, so it is not surprising that the value and cyclical stocks have held up better than their growth counterparts.
The ActivTrades sentiment indicator shows that more traders on the platform are looking for a bounce around the 15000 level, but the key support is 14750 and if that goes, there is a quick move down to the 14000 level in the making.
Around 14600 would be the next level some support could come in as it has been a market structure pivot in the past. The breakdown of that structural support would then have to act as new resistance with the daily 200 ema the next level of dynamic support coming in around the 14000 big figure.
14850 has so far acted as the pivot today with the Asia-Pac session being held below, only for the London session to trade above it from the London open. I am a great believer in waiting for the initial balance to carve out a range and then for the market to show which direction it would like to travel.
Today the Initial Balance at the start of the US session broke to the downside, so a short to 14737 has a 66% chance of being reached with the 14680-level having a 33% probability of being tagged. These are intraday probabilities and give a guide of how far a market could run before being over-extended. The key is to find a level of old resistance that acted as support for a period, before becoming a level of resistance again. If you use this technique you can come into the market-fresh each day and closeout at the end of a trade or session, to mitigate the overnight risk.
Currently, the big macro risks are coming from the US government who is thrashing out Bills to fulfil the debt obligations of the US Treasury, fund the next fiscal year’s budget. But also, for President Bidens pledges he made in his manifesto to his backers and the citizens of the USA, like the infrastructure bill.
For now, I would be short whilst the uncertainty lingers in the air and the yields push higher. The time to go long again will become evident and the yields are likely to give advanced notice.