From the last week’s analysis, we looked at the historic analysis of the NASDAQ 100 applying Elliott Waves. The chart above shows that we are waiting for the end of Expanded Flat wave (b). It seemed that the next burst of the tech bubble was coming soon. Now as Friday 26th closed, it is already showing potential for bears to trigger the next sell-off.
On the 4-hour chart above we see good uptrend line and a 200SMA almost in line with it. Price action formed a nice Head and Shoulders pattern, supported by RSI divergence. At the moment of writing weekend rates on indices show bearish momentum, most likely the open will have a small gap lower on NASDAQ. If the trend line and 200SMA break, then next support is around 9400/9500 level. Pullback or consolidation is expected there. If this is the end of wave (b), then wave (c) should progress now in a 1-2-3-4-5 wave formation. This can be confirmed if the next week shows some panic selling. For that we need a trigger that will put Fear above Greed.
Recent news and reports from Central Banks and IMF showed a downgrade of the economic forecast, putting a bit more realism into the markets that things are quite bad and we shall deal with the fallout of this for a long time. Since NASDAQ was the one index that went back to making new all-time highs, the burst of the tech bubble might be the bloodiest.
The top 20 companies of the NASDAQ 100 weigh about 70.4% of the index. And various charts of those companies show bullish exhaustion. Every chart on that list had a very bearish Friday and closed the weekly candle, suggesting further downside.
Apple, Amazon and Microsoft, the 3 top giants of NASDAQ together make around 34% of the index. Weekly candles on all 3 stocks show potential for a reversal.
Complete discrepancy between the real economy and the stock market became the main talk of all investors and financial institutions. The primary concern is that inflating the stock market with stimulus as the Central Banks have been doing since March, will only make the eventual fall much harder, and just delays the inevitable. While the tech sector flourished during lock down as online services became more important than ever, the financial conditions of the consumers continued to deteriorate, and eventually, the reality of the situation must catch up with the stock market.
The contrarian view is that the current bearish signals will be used as ‘buy the dip’ moment. As indices will go lower, investors will jump in to buy on the cheap. We also must consider the additional stimulus that can be created. They can print as much as they want after all. Any news on the new financial support measures could boost the market. USA can’t afford a complete collapse of the stocks, that is a huge chunk of their wealth. D Trump and his team might make some announcements next week, especially if Monday starts with a sell off. So, the current H&S pattern might be good for intraday traders, but we need more bearish confirmation for a longer-term view.
