Berenberg issues a technical sell signal for Nasdaq 100 amid overbought conditions

Berenberg analysts issued a sell signal for the tech-heavy Nasdaq 100, noting that the 14-day relative strength index (RSI) for the index has breached 80 for the fourth time in five years, reaching its highest level in that period at 81.6.

RSI, a momentum oscillator used in technical analysis to gauge whether a security is overbought or oversold, has been a reliable indicator for adjusting Nasdaq 100 risk over the past few years and year-to-date, analysts said.

Driven by Nvidia (NASDAQ:NVDA) and the Magnificent 7 group, the Nasdaq 100 has returned 18.8% year-to-date. Remarkably, 99% of this return has occurred since the RSI fell below the 30 level on April 19.

“Now, an 80+ RSI suggests investors bank gains and position for consolidation,” Berenberg analysts said in a note.

The investment bank identified three previous instances in the last five years where the Nasdaq 100's RSI breached 80 – in December 2019, January 2020, and September 2020. The average maximum drawdown within the six months following these breaches was -22.9%.

“This compares to an average maximum drawdown of -11.3% from the seven Nasdaq 100 RSI breaches above 75 which did not extend to above 80,” analysts highlighted. “Again, this suggests that investors should turn their hazard lights on at this point.”