The Nasdaq-100 and big tech stocks fell more than 2.5% in Wednesday’s brutal session and could lose additional ground before attracting fresh buying interest. Shareholders shouldn't be surprised by the downturn, given dramatic gains posted since the calendar flipped to January. Even so, the first day of a long-term downtrend can look exactly like a one-day pullback, raising the question: is this a top or potential buying opportunity?

Let’s examine the index and top components for clues about price direction in coming weeks, recognizing that no one knows how current events will ultimately play out in Washington, D.C. That locale is especially confusing for market technicians at the moment because it’s unclear how much political tension is responsible for this week’s downside, as opposed to normal price behavior in a market group that’s reached extremely overbought levels.

QQQ

The Powershares QQQ Trust (QQQ), index fund for the Nasdaq-100, topped out within 6-points of the 2000 bubble high in July 2015 and entered an intermediate correction that found support at the 200-week EMA in the mid-50s during the August mini flash crash. It posted higher February and June 2016 lows within a recovery wave that finally mounted resistance in August. The fund ground sideways on top of new support for four months and ejected in a powerful trend advance that stalled above $132 in March 2017.

It broke out in a fresh rally leg in April while other broad benchmarks struggled, flashing a number of technical warning signs. The rally ended abruptly this week in a vertical decline that gave up nearly three weeks of gains. The unfilled April 24 gap between $133 and $134 now marks a logical downside target, with the 50-day EMA rising into alignment with that level. It’s also the top of the prior trading range, which should act as a natural platform for a high bounce.

A breakdown toward $130 won’t alter the bullish technicals because the index has built multiple support layers since the second quarter of 2016. The red trendline of higher lows since August 2015 marks strong support in the upper-120s, intensified by the 50-week and 200-day EMAs. A decline into that level should set off intermediate buying signals that favor position trades lasting at least two to four months. Meanwhile, the top of the 2-year range at $115 presents a major line-in-the-sand that must hold because a breakdown would signal a possible bull market top.

AMZN

Key components Amazon.com, Inc. (AMZN) and Apple, Inc. (AAPL) signal the likely end of their long-term advances and starts of intermediate corrections that could last into the fourth quarter of 2017. As noted in Amazon Rally Could End At Hidden Resistance in April, the retail powerhouse has reached Fibonacci and Elliott Wave targets within a rising wedge pattern. The stock is now exposed to a decline into wedge support in the upper-800s, with a breakdown signaling a much steeper slide toward $600.

AAPL

All Eyes On Apple in early May noted the Cupertino icon could trade up to $160 after a strong earnings report but would then have to deal with major resistance at a four-year rising channel. The rally peaked at 156.65 earlier this week, giving way to a 3% mid-week decline. While a short-term bounce could reach the upper channel line, the powerful rally off the May 2016 low may now be coming to an end, with downside potential into the 120s.

The Bottom Line

The Nasdaq-100 fell sharply this week, following a powerful trend advance that set off numerous overbought technical signals. An intermediate decline is natural in this scenario, sharply raising odds for a mid-year correction. However, long-term bulls have the winds at their backs because it will take much lower prices to break the uptrend in place for the last year.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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