Nasdaq 100 Index RSI hits a level that triggered a 16% crash last time

The Nasdaq 100 Index continued its strong bull run this month, reaching its highest point on record. It was trading at an all-time high of $29,235, up by over 15% this year. This rally will be put to the test as the index has become the most overbought since June 2024. 

Nasdaq 100 Index has become highly overbought

The daily chart reveals that the Nasdaq 100 Index has been in a strong rally after bottoming at $22,847 on March 31 this year. This initial plunge happened after the US launched its war against Iran, which pushed crude oil, natural gas, and fertilizer prices higher.

The index then started soaring as investors embraced the new normal, after the two sides started their ceasefire. It also happened when the Fear and Greed Index plunged to the extreme fear zone of below 10. 

The Nasdaq 100 Index has now soared and moved above the important resistance level at $26,137, its highest point in October last year and January this year. It has moved substantially above the 50-day and 100-day Exponential Moving Averages (EMA).

Still, two potential risks may impact its performance. For example, the index has become highly overbought, with the Relative Strength Index (RSI) moving to 82.60, its highest level since June 2024. A highly overbought asset is usually a sign that it is in a strong momentum. 

However, in most cases, a highly overbought asset often goes through a retracement as investors book profits. A good example of this is what happened the last time when the Relative Strength Index (RSI) jumped to these levels. It was trading at $20,630 and then dropped by 16% to $17,445 a few weeks later as investors booked profits. The recovery started when the index neared the oversold level.

Therefore, it is likely that the Nasdaq 100 Index will pull back in the coming days or weeks. For one, it needs to retest the important support level at $26,137 to complete the break-and-retest pattern, which is a common continuation sign.

Nasdaq 100 Index chart | Source: TradingView

Potential risks for US stocks

There are several potential risks that may trigger a Nasdaq 100 Index retreat in the coming weeks. First, there is a risk that the US and Iran will restart their kinetic activity in the coming days or weeks. The two sides already exchanged fire at the Strait of Hormuz on Friday, while Trump has said that he was not satisfied with Iran's response to the US proposal.

On Saturday, Trump shared several clips from Mark Levin, a Fox News contributor, who made the case for more attacks. He argues that another sustained attack will force the Iranians to agree to US demands. 

In reality, however, Iran believes that it has won the war. Also, US intelligence report suggest that Iranians still have about 75% of their mobile launchers and other equipment. Also, it believes that it has more cards to play, including bombing key energy infrastructure in the region.

The other potential risk is that the Federal Reserve may maintain higher interest rates for longer. Last Friday’s US jobs report showed that the labor market soared in April, with the economy adding over 115k jobs. A report coming out on Tuesday is expected to show that the inflation rate jumped to 3.6% in April. As a result, the Fed may decide to hike interest rates later this year.

Additionally, there are fears that the ongoing semiconductor rally is unsustainable. Michael Burry compared it with the dot-com bubble when top stocks like Cisco soared. As a result, there is a likelihood that investors will start booking profits, which may lead to a pullback.