What is Nasdaq 100?
The Nasdaq 100 Index (ticker: NDX) is the equity index comprised of the 100 largest companies listed on the Nasdaq market.Â For those unfamiliar with the term Nasdaq, it stands forÂ National Association of Securities Dealers Automatic Quotations.
Currently, Nasdaq is one of the largest stock exchanges in the world. Setup in 1971, Nasdaq has a longstanding history of hosting growth company. It gained its popularity because Nasdaq was the first exchange to trade stocks electronically. At that time, it was a quantum leap in share trading. (see GMGs Guide To Nasdaq)
Currently, some of the worlds biggest tech companies are components of the Nasdaq 100. For example, the five largest stocks of the index are Apple, Microsoft, Amazon, Facebook and Google (see below):
Nasdaq 100 is capitalisation weighted, this means that companies with higher market capitalization carry a higher weightage in the index.
Can you trade the Nasdaq 100 Index?
Yes, you can. There are multiple financial products derived from the underlying Nasdaq 100 Index that you can trade with, including:
- Exchange-Traded Funds (link)
- Investment Funds
- Spread trading
Read the GMG Guide on Index Trading.
The biggest ETF based on the Nasdaq 100 Index is the QQQ ETF (ticker: QQQ). For many years, this ETF is one of the most traded instruments in the US market. Investors like to gain exposure to the Nasdaq through this ETF.
What is the attraction of Nasdaq 100?
Nasdaq Indices (100 and Composite) are the most-followed equity indices in the world. NDX is attractive to investors and traders alike because:
- Nasdaq 100 is a growth index - you can participate in the best success stories
- Nasdaq 100 offers good liquidity - some of the NDX components were the most valuable in the world at one time or another (Apple, Microsoft, and Amazon)
- Nasdaq 100 offers better relative performance than many other large-cap indices
Moreover, the Index is volatile enough to attract traders. Therefore, daily liquidity of the index is good.
What drives the Nasdaq 100?
Stock markets are driven by a wide variety of factors, including some of the following:
- Macro factors (e.g. GDP, unemployment, business indicators etc)
- Monetary factors (e.g., Quantitative Easing, rates movements, yield curve etc)
- Technical factors (e.g., new highs)
For the Nasdaq 100, another factor to watch out for is speculative bubble.
During the nineties, for example, Nasdaq stocks soared amidst a wave of speculative trading interest. Companies worth only millions only a short while ago attained multi-billion valuation - only to see these valuation figures collapsed to zero when the bubble burst. Easy come, easy go.
Next, if you are trading NDX short term, you will need to pay attention to news flow and data announcements because they can have massive impact on the index over the short term.
Another area to watch out for are Federal Reserve meetings and the release of FOMC minutes. Any change in interest rates beyond market expectations can cause violent swings in the SPX. For example, if investors were expecting a 0.25% hike but the central bank raised it by 0.5% - this may cause prices swing massively after the announcement.
Studying the reaction of the market to these factors are important.
How to trade the Nasdaq 100 using technical indicators?
To trade the Nasdaq profitably requires a good trading strategy, of which technical indicators may come in handy. Technical indicators include:
- Trend indicators like moving average
- Price action
- Support & resistance levels (see GMG Guide on Support/Resistance)
- Patterns like breakout and reversals
For example, you may use the moving averages to judge whether the index is still trending or due for a reaction.
Another favourite indicator is a break of resistance or support levels. Look at the Nasdaq 100 ETF (QQQ) below. It was clear that the breakout above the 195 key resistance last month resulted in a persistent rally into 204 (see below). This resistance, now broken, may even convert into resistance.
Bear in mind, however, the different traders will gravitate towards different trading styles. Therefore you must find the technical indicators that best support your trading objectives.
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