The Nasdaq’s rally has stalled after hitting a new all-time high around May 14, and we have now seen five straight days without a higher high. This loss of momentum is a warning sign that the market is at a critical juncture. The price action today, Friday, May 22, will be very telling for where we are headed in the next few weeks.
We’ve seen this hesitation align with recent economic data, as the latest Consumer Price Index report came in slightly hotter than anticipated, raising questions about the path of interest rates. This uncertainty is making traders nervous about holding onto high-valuation technology stocks. The VIX, a key measure of market fear, has also reflected this, climbing from a low of 14 to over 18 in the past two weeks.
Key Levels And Near Term Direction
Given the potential for a larger pullback, derivative traders should consider buying some protection. If today closes on a bearish note, purchasing NQ put options for June expiry could provide a hedge against a decline toward key moving average support zones. This is a straightforward way to prepare for the increased choppiness we anticipate.
For those who believe the market will simply consolidate sideways, strategies like an iron condor could be effective. This approach profits from a lack of movement, which fits the scenario where the Nasdaq chops around after failing to break its highs. Options data shows an increasing number of traders positioning for this range-bound activity.
A bullish breakout is still possible, but the slowing momentum calls for a cautious approach. Instead of buying naked calls, traders could use bull call spreads to reduce their cost and define their risk. This strategy is better suited for a slow grind higher rather than an explosive continuation of the trend.
Historically, we have seen similar setups, such as in the third quarter of 2023 when the market paused for several weeks following a significant run-up. That period led to a healthy correction of nearly 10% before the long-term uptrend resumed. Such a pullback now would not be out of character for the market and could set up better buying opportunities later.
