Nasdaq 100 index is hanging on a thread: may drop to $13,825 soon

The Nasdaq 100 index is hanging on a thread as risks to the market continued soaring. The tech-heavy index retreated to a low of $14,621 on Monday, the lowest level since August 25th. It has dropped by more than 7% from the highest point this year.

Risks cloud outlook

The Nasdaq 100 index has been under intense pressure in the past few weeks as risks to the market have risen. First, there are elevated inflation risks as the price of crude oil rises. Brent rose to the year-to-date high of $95 last week. While it has retreated to $92, analysts believe that it will rise to over $100 soon.

Second, there are lingering supply chain risks as the drought in the Panama Canal pushed water to historic lows. This traffic jam will likely lead to more economic weakness in the coming months.

Third, and most importantly, the Fed has made many tech stocks less attractive. The Fed decided to leave interest rates unchanged between 5.25% and 5.50%. It also hinted that it will continue hiking rates in the coming months.

The rising interest rates have made risk-free assets more attractive. For example, the 2-year bond yield has jumped to 5% while the 10-year and 30-year have risen to their highest levels in decades.

There are other macro factors in play. The M2 money supply has retreated sharply in the past few months while consumer spending is expected to keep falling as Americans start paying their student debt.

Most importantly, there are significant risks in tech stock valuations. Companies like Nvidia, Meta Platforms, and Tesla have all become highly overvalued because of the hype surrounding artificial intelligence. Some analysts believe that the bursting of the AI bubble will lead to more downside.

Nasdaq 100 index analysis

The daily chart shows that the Nasdaq 100 index is hanging on a thread. It is trading at $14,771, a few points above the key support at $14,575. This was the lowest level on August 18th and the neckline of the double-top pattern. 

The Nasdaq 100 index is also hovering at the 100-day moving average and at the 23.6% Fibonacci Retracement level. Therefore, the outlook for the tech-heavy index is downward, with the next level to watch being at $13,826, the 38.2% retracement point. This price is ~6.32% below the current level.