How to Trade the Nasdaq in Light of the Fed Decision | Investing.com

• Strong cloud and AI growth is supporting fundamentals, but much of the optimism may already be priced in.
• Risk-off sentiment and capital-spending concerns are weighing on the stock.
• A sustained move above key resistance would strengthen the recovery case.

US stocks came under renewed selling pressure as rising Treasury yields and weakness in Asian markets weighed on sentiment, although the and showed signs of recovery around key technical support levels.

The market is also weighing expectations for the Federal Reserve’s next rate decision. A 25-basis-point is widely priced in, while current market pricing also points to two additional hikes over the following year. 

However, there are questions over whether those further increases will ultimately be needed, particularly if inflation pressure remains concentrated in energy prices.

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Nasdaq 100 Finds Support

The opened with a sharp selloff before recovering part of the decline, followed by another wave of selling later in the session. Weakness in South Korea added to the pressure, while the U.S. 10-year Treasury yield also moved higher. The index then showed some signs of recovery heading into the open, with the two-hour chart pointing to a potential stabilization around key support.

The 28,800 region has emerged as an important support level after the recent decline. Holding this area could give the Nasdaq 100 room to recover, particularly if Treasury yields ease and broader market sentiment improves. The immediate price action therefore remains centered on whether buyers can defend this level after the latest bout of selling.

The broader rate backdrop remains an important factor for the index. The market is already pricing in a 25-basis-point Fed rate hike, while expectations also include two additional hikes over the following year. Those expectations have contributed to the rise in longer-term Treasury yields, which can weigh on growth and technology stocks because higher yields reduce the relative appeal of future earnings.

At the same time, the current weakness has occurred alongside pressure in Asian markets, including South Korea. That matters for the Nasdaq 100 because semiconductor and technology stocks remain an important part of the index. A stabilization in those areas, combined with a pause in Treasury yields, could therefore help support a recovery from the 28,800 region.

S&P 500 Shows a Similar Setup 

The is showing a similar setup, with the 7,575 region emerging as an important support level. After the recent selling pressure, the index is also showing signs of stabilization around this area, suggesting that buyers could step in if support holds.

The level is particularly relevant given the broader pressure from rising U.S. Treasury yields and changing expectations around Federal Reserve policy. If the S&P 500 can hold above 7,575 and regain some upward momentum, the recent decline could develop into a recovery rather than another leg lower.

For now, 7,575 remains the key level to watch. A sustained hold around this area would support the recovery scenario, while a decisive break below it would weaken the near-term technical picture.

Russell 2000 Sensitive to Interest-Rate Expectations 

The also moved lower after initially holding up relatively well. The small-cap index remains particularly sensitive to interest-rate expectations because higher borrowing costs can have a greater impact on smaller companies.

Rate Expectations Remain Central to the Market

The Fed is expected to raise its policy rate by 25 basis points, a move that is already largely reflected in market prices. The more important question may be what happens after that decision.

Market pricing currently points to two additional rate hikes over the following year. That path could prove more important for stocks than the immediate 25-basis-point move.

If the Fed delivers the expected hike, attention will turn to the accompanying comments and outlook. If policymakers signal less willingness to continue tightening, that could provide a catalyst for equities.

The argument for a less aggressive path centers partly on the source of current inflation pressure. Higher oil prices can push inflation higher, but monetary policy has limited ability to directly address an oil supply shock. At the same time, U.S. money-supply growth remains below its longer-term average, suggesting financial conditions remain relatively tight.

Semiconductor Stocks Reach Important Levels

The Roundhill Memory ETF (NYSE:) has shown strength despite weakness in South Korean equities. The 54 level remains an important support and stop-loss area, with the ETF moving higher from that region.

The semiconductor ETF has also pulled back significantly and is now testing support. The 540 area is particularly important. A small move below the level could occur, but a recovery from around this region would improve the short-term setup. Fresh buying may make more sense after the ETF demonstrates some strength.

The software ETF was also strong initially before pulling back again. That makes the current setup less attractive for initiating a new position until the price action becomes clearer.

Rocket Lab and Space Stocks

Rocket Lab has attracted considerable attention after turning higher around the 60.50 support area. On the four-hour chart, the stock remains below approximately 65, which is an important level to reclaim before considering a fresh entry.

The setup suggests a potential recovery from current levels, although confirmation above resistance would provide a stronger technical signal.

Other space-related stocks are showing mixed but constructive price action. Ast Spacemobile (NASDAQ:) remained positive despite the broader market weakness. A move above approximately 62.50 would provide a potential technical trigger for a new position.

There is also continued caution around SpaceX (NASDAQ:), which is trading within a range between roughly 144 and 154. The current approach remains one of waiting for a clearer breakout.

Cybersecurity Shows Strength While Semiconductors Lag

Cybersecurity stocks delivered a strong move, reaching the 100 to 102 resistance region. A pullback from that area could create another entry opportunity if the longer-term upward trend remains intact.

The divergence between cybersecurity and semiconductor stocks is particularly interesting. Artificial intelligence is expected to increase the importance of cybersecurity as AI systems become more capable and potentially create new security challenges. Yet some of the companies viewed as the infrastructure providers for AI, including Nvidia and semiconductor ETFs such as SMH, have recently come under pressure.

That creates an unusual market dynamic. If AI adoption continues to accelerate, demand for the underlying computing infrastructure should also remain important. The different performances across these segments therefore suggest that investors are currently assigning different valuations and expectations to various parts of the AI ecosystem.

IGV also provides some exposure to cybersecurity companies, making the broader technology ETF relevant to this theme.

TLT Remains a Hedge Rather Than a Rate-Cut Trade

The long-duration Treasury ETF has fallen to levels last seen around 2024 as U.S. 10-year yields have risen.

Rather than treating the current decline as an automatic buying opportunity, the preferred approach is to wait for evidence that the 10-year yield has peaked and started moving lower.

TLT can have a different role in a portfolio. If a major economic or financial crisis leads the Fed to cut rates sharply, long-duration Treasuries could benefit. For that reason, holding roughly 10% to 15% of a portfolio in an instrument such as TLT can serve as a hedge.

The investment case becomes weaker when the sole objective is to speculate on an imminent decline in Treasury yields. Rates could remain elevated for longer, making confirmation more important.

TLT also pays distributions, which adds an income component to its role as a potential portfolio hedge.

Energy Stocks Face a Higher Oil Price Test

The energy ETF has continued higher after breaking through the 60 resistance area, following the rise in oil prices.

The longer-term upside for oil, however, remains uncertain. Oil previously reached around 120 during a period of much more severe disruption. Current conditions differ, with transportation routes operating and infrastructure potentially returning to service even before repairs are fully completed.

That makes another move toward the previous extreme levels harder to justify based solely on the current situation. XLE’s strong run therefore warrants some caution after its move through resistance.

AI Could Change the Longer-Term Growth Outlook

The longer-term investment picture could look very different if artificial intelligence delivers the productivity gains expected by some industry forecasts.

Research published by Anthropic, referenced in the analysis, points to potentially substantial productivity improvements. Under a base scenario, the additional productivity gain could reach around 1.6%. Stronger outcomes could produce substantially larger gains, with estimates reaching as high as 8% in some scenarios.

Such gains would have major implications for economic growth if they materialize. An economy growing at 3% could theoretically reach 4.6% under the 1.6% additional-productivity scenario, while a much stronger productivity outcome could produce dramatically higher growth.

Higher productivity could eventually create a more growth-oriented investment environment and potentially place downward pressure on bond yields as the economic outlook changes.

The timing remains uncertain, however. Markets are currently trying to price the transition while the economic effects of AI are still developing.

Key Levels to Watch

For the near term, the Nasdaq’s 28,800 area and the S&P 500’s 7,575 level remain important support zones. A sustained recovery from those levels would improve the short-term technical picture, while renewed selling could expose the market to another leg lower.

The same principle applies across individual sectors. Semiconductor ETFs are approaching support, cybersecurity stocks are testing resistance after a strong run, and space stocks are waiting for key technical breakouts.

With monetary policy still central to market pricing, the next Federal Reserve decision and guidance will likely be more important for the broader market than the 25-basis-point move itself.

The combination of elevated rate expectations, higher oil prices and recent equity weakness calls for patience around new positions. At the same time, the potential long-term productivity impact from AI provides a structural theme that could reshape the market as its economic effects become clearer. 

Disclaimer: This article is written for informational purposes only. It is not intended to encourage the purchase of any assets and does not constitute an offer, solicitation, recommendation, or advice to invest. I would like to remind you that all assets are evaluated from multiple perspectives and are highly risky; therefore, any investment decision and the associated risk are the sole responsibility of the investor. Additionally, we do not provide any investment advisory services.