- The Nasdaq 100 is poised for an oversold bounce after its 15% sell-off, according to Fairlead Strategies' Katie Stockton.
- "There are signs of intraday downside exhaustion supporting temporary relief from negative short-term momentum," she said.
- Stockton recommends investors use any bounce as an opportunity to reduce equity exposure.
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An oversold bounce in the Nasdaq 100 is "poised" to develop in the near-term following a swift 15% decline, according to technical analyst Katie Stockton of Fairlead Strategies.
A key area of support for the tech-heavy index is 14,400, which "would be a natural place for an oversold bounce to unfold," she said in a Monday note. The Nasdaq 100 fell nearly 3% to just under 14,000 in Monday's trading session.
"There are signs of intraday downside exhaustion supporting temporary relief from negative short-term momentum this week," Stockton explained, adding that short-term oversold conditions are the most widespread since October 2020.
Also providing fuel for a potential bounce is depressed investor sentiment, which suggest "a minor low will be put in place early this week," she added. Last week's AAII investor sentiment survey saw its most bearish reading in 10 years.
But rather than buying stocks, investors should use the potential relief rally as an opportunity to reduce exposure to equities, according to Stockton, who highlighted "widespread breakdowns" across markets.
"Our long-term gauges continue to deteriorate, with the monthly stochastics having fallen below 80% for the Nasdaq 100, a monthly (moving average convergence divergence) 'sell' signal having been generated by the Russell 2000, and a possible breakout in the VIX," Stockton explained.
The VIX, also known as Wall Street's fear gauge, has more than doubled in 2022, hitting a high of 38 on Monday.
All of this points to a more volatile trading environment for stocks in 2022, similar to the environment seen in 2018, according to Stockton. Volatility was mostly absent from the stock market in 2021, with the S&P 500 seeing a decline of only 5% during a year that ended with a 27% gain.