Nasdaq Composite falls below 200 day trend line for first time since April 2020

Nasdaq Composite falls below 200 day trend line for first time since April 2020

The Nasdaq Composite Index was at its first close below the long-term trend line since April of 2020, and investors may be wondering how the benchmark will perform in the near-term after slipping below that mark.

On Tuesday, the Nasdaq Composite COMP fell 2.6% to 14,506, nearing its correction level of 14,451, following the holiday in observance of Martin King Luther Jr. Day. Its Nov. 19 record close and common definition of a correction would be met by 69, which would represent a decline of 10% from its Nov. 19 record close.

The index breached another important level that market technicians consider to be the dividing line between bullish and bearish momentum in an asset in the interim. The 200 day moving average of the Nasdaq Composite is 14,730, 75, according to FactSet data.

The close below the 200 day trend line put an end to a streak that has lasted nearly 440 trading sessions, or well over a year.

The question is how does the Nasdaq Composite perform once it has slipped below the 200 day MA after a streak of at least a year, and the folks at Bespoke Investment Group have some insights.

One week performance has tended to be negative following the first close below the 200 DMA with positive performance only 44% of the time and a median decline of 0.11%, according to Bespoke researchers.

Investors are bracing for the risk of the first half-point Federal Reserve rate increase in more than 20 years in March.

One and three months later, the NASDAQ has gone up a bit more than half the time. Six to 12 months later, BIG writes that the median and average gains are smaller than the norm, and that has been positive more consistently over the past two-thirds of the time.

The Dow Jones Industrial Average DJIA was a 1.5% drop near 35,368, while the S&P 500 SPX ended down 1.8%, at about 4,577, falling below the psychologically significant level of 4,600.

The stock price fell sharply as Treasury yields went up in anticipation of the Federal Reserve tightening monetary policy this year. The Federal Open Market Committee is going to hold a meeting on January 25 -- 26 and is likely to start a series of rate increases and policy tightenings as it fights inflation.

The yield on the 10 year Treasury note BX: TMUBMUSD 10 Y was trading around eight basis points higher Tuesday afternoon at around 1.87%, its highest level in about two years, while the 2 year Treasury note BX: TMUBMUSD 02 Y, which is more sensitive to Fed policy expectations, went up 8 basis points to about 1%.

Here is how the Federal Reserve may shrink its $8.77 trillion balance sheet to combat high inflation.

Rising yields are weighing on the yield sensitive tech stocks and growth themed areas of the market because increased borrowing costs and rates mean that investors have to discount the value of a company's future cash flows, and that is causing a wide re-calibration of tech and tech related shares that populate the Nasdaq.

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