NASDAQ on the Brink: Major Pullback Ahead? A Look at the Market

13 Sep 2024

Greetings, traders and market visionaries! It’s Lord Medz here once again, and today we’ll be analyzing the NASDAQ and the potential for a massive pullback, similar to what we discussed with the US500. However, this time we’re also going to dive into an important indicator that’s flashing warning signs for the broader economy—the US Treasury Yield Curve, specifically the inversion between the 2-year and 10-year yields.

The NASDAQ is currently at a critical juncture, having completed five supercycle waves according to the Elliott Wave Principle. The market could be on the verge of a sharp correction, and when paired with the concerning yield curve inversion, the stakes couldn’t be higher.

NASDAQ’s Elliott Wave Mega Cycle: Are We Done?
Over the past several years, the NASDAQ has surged thanks to the tech boom, accommodative monetary policies, and investor enthusiasm. However, based on Elliott Wave analysis, it appears that the NASDAQ may have completed five supercycle waves, potentially signaling the end of this massive bullish phase.

Here’s what we’re watching:

Five-Wave Completion: According to Elliott Wave theory, markets move in repetitive wave patterns, and the NASDAQ may have completed its fifth and final impulse wave of the current supercycle.

Retracement Ahead? If we are indeed at the end of this supercycle, the NASDAQ could be on the cusp of a 50%, 60%, or even 70% pullback. This would mean a significant retracement from current highs, potentially wiping out gains made since the early days of the pandemic in 2020.

Potential Pullback Scenarios
50% Pullback: A correction of this magnitude would take the NASDAQ back to levels near 7000-8000, which represents a substantial drop but would still leave the long-term bullish structure intact.

60% to 70% Pullback: In the event of a deeper correction, we could see the NASDAQ falling to levels below 6000, erasing years of gains. This would be similar to the aftermath of the dot-com bubble crash, where the market underwent a severe reset before recovering.

The key levels to watch are 7000, 6000, and the 5000 range. A break below these levels could signal more trouble ahead, and a possible shift in long-term market structure.

The US Treasury Yield Curve: A Key Warning Sign
Adding to the concern is the inversion of the US 2-year and 10-year Treasury yields. Historically, this yield curve inversion is a reliable indicator of a looming recession. Here’s what’s happening:

Inverted Yield Curve: Normally, longer-term bonds (like the 10-year) should offer higher yields than shorter-term bonds (like the 2-year) because investors demand more return for taking on longer-term risk. However, when the 10-year yield falls below the 2-year yield, it signals that investors expect economic trouble ahead.

Recession Indicator: This yield curve inversion has occurred before most recessions in modern US history, including the 2008 financial crisis and the 2001 dot-com bubble. In fact, the yield curve has inverted again in 2023, raising alarms about the possibility of a recession within the next 12 to 18 months.

When the yield curve is inverted, it implies that short-term economic risks are rising, and market participants are flocking to the safety of longer-term bonds. This can lead to tightening financial conditions and a slowdown in economic activity—factors that could heavily impact the tech-heavy NASDAQ.

The Yield Curve and the NASDAQ
The NASDAQ, with its high exposure to growth stocks, tends to be particularly sensitive to changes in interest rates and the broader economic environment. A sustained yield curve inversion can lead to:

Higher borrowing costs for businesses, particularly in the tech sector, which thrives on cheap capital for innovation and growth. Rising rates can squeeze margins and dampen investor enthusiasm for growth stocks.

Decreased consumer spending, as higher short-term rates make borrowing more expensive for households and businesses alike. This can lead to lower revenues for companies, particularly in discretionary and tech sectors.

Recession fears translating into lower stock prices, as investors begin to price in slower economic growth and shrinking corporate profits.

Given these factors, the combination of a completed Elliott Wave supercycle and an inverted yield curve suggests that the NASDAQ may face substantial headwinds in the coming months.

Conclusion: Is a Major Pullback Inevitable?
We are at a critical stage in the NASDAQ’s journey, and the signals are flashing red. With the Elliott Wave analysis pointing to the end of a major supercycle and the inverted US Treasury yield curve signaling potential recessionary conditions, the risk of a major correction seems high.

Whether we see a 50%, 60%, or 70% pullback, the coming months could be pivotal. The yield curve inversion should not be ignored, as it historically precedes economic downturns—and a downturn in the broader economy will almost certainly impact the tech sector and the NASDAQ.

For traders and investors, this is a time to be cautious. As always, it’s essential to manage risk, diversify holdings, and keep an eye on key support levels. A major correction could present long-term opportunities, but only for those who are prepared to weather the storm.

Stay sharp, stay informed, and trade with care.

Peace, Lord MEDZ.

Disclaimer: This blog is for informational purposes only and should not be considered financial advice. Always consult with a financial professional before making any investment decisions.