Nasdaq pares losses on renewed US-Iran deal hopes before midterms

The Nasdaq experienced a sharp decline last week, mainly driven by technology and AI-related stocks. Worries about the profitability of significant AI investments, disappointing corporate results and increasing borrowing costs prompted a notable shift away from Big Tech.

Market participants began doubting whether the large sums being poured into AI infrastructure will yield sufficient returns to justify the spending.

AI investment has become a notable driver of US economic growth, meaning a sustained drop in spending could have a detrimental impact on the overall economy.

The sell-off, however, began weeks earlier as macroeconomic and geopolitical challenges grew. Higher-than-expected inflation data fueled concerns about a lengthier tightening cycle, while renewed tensions between the US and Iran weighed on growth expectations as oil prices climbed. This occurred amid crowded positioning.

Going forward, attention will be on US-Iran talks and the US midterm elections. Risk sentiment improved somewhat after Iran proposed over the weekend a two-day framework to reopen the Strait of Hormuz in exchange for US concessions, including sanctions relief, the release of frozen assets and the lifting of the blockade.

This is a shorter timeframe than the seven-day framework proposed a month ago. Markets viewed the reduced timeline as a positive sign, although the US has yet to accept the proposal and negotiations continue. A breakthrough would likely trigger a strong rally based on improved growth expectations and reduced rate hike bets. Conversely, setbacks could put further pressure on the Nasdaq.

On the US midterm front, I believe a Democratic House is already priced in, but a blue sweep could add more pressure on the stock market due to expectations of stronger fiscal restraint, if not combined with a US-Iran breakthrough. A surprising red sweep, on the other hand, could be positive as markets might reprice anticipated fiscal restraint.

NASDAQ TECHNICAL ANALYSIS – DAILY TIMEFRAME

The Nasdaq (US100 CFD contract) broke below the key 28,800 support zone. This has opened the possibility of a drop toward the 26,971 level. Sellers are expected to step in around the broken support, with a defined risk above it, to continue pushing into new lows. Buyers, meanwhile, will want to see the price breaking higher to enter for a pullback into the downward trendline.

NASDAQ TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

NASDAQ TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, there is not much to add, as sellers will have a better risk-to-reward setup around the broken support, while buyers will need the price to rise back above that zone to open the door for new highs. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Today brings the US ISM Manufacturing PMI. Tomorrow features the US Job Openings data and the US midterm elections. On Wednesday, the US ADP and US ISM Services PMI are due. Thursday provides the latest US Jobless Claims data. On Friday, the week ends with the US NFP report and the University of Michigan Consumer Sentiment survey.