Technical outlook: Price bubble implosion in equities
Kim Cramer Larsson
Technical Analyst, Saxo Bank Group
Summary: The Nasdaq-100 Index has a clear bubble pattern. According to the theory of bubbles, there is at least one large correction known as a bear trap - sometimes even two - during a long uptrend.
Price bubble implosion in equitiesThe Nasdaq-100 Index has a clear bubble pattern. The following figure shows an example of a bubble—the dotcom tech bubble back in the 1990s.
According to the theory of bubbles, there is at least one large correction known as a bear trap—sometimes even two—during a long uptrend. When a bubble implodes the price will always come back to at least the peak of the last larger correction, but quite often also to the bottom of it. Sometimes, it goes all the way to the base of the market before prices really take off.
If this time around is no different from other bubbles—it never is—the Nasdaq should drop down to at least around 9,736. We are currently only 12 percent from that level.
Between the two previously mentioned large corrections, the 2018 one was bigger.
The peak of that correction is around 7,673, tucked in between the 0.764 Fibonacci retracement of the whole uptrend since the subprime crisis trough and the 0.618 retracement of the ‘Corona bottom’ and all-time high. However, sometimes we see prices drop below the last correction low.
The implosion of a bubble is usually at least twice as fast as the build (prospect theory, where the pain of losing is 2 to 2.5 times as hard as making a gain). This equates to a bottom in equities in 2023 and 2024.
If you think that a drop in Nasdaq below 9,000—maybe even down to 8,500 or 7,500—is a lot, bear in mind that after the dotcom bubble peak and subsequent implosion, the Nasdaq dropped 77 percent from 2000 to 2002. Below its pre-peak/bear trap correction, the RSI is testing at 40 threshold. If it performs a monthly close below 40, the sentiment is bearish. This is a scenario not seen since the subprime crisis.
2022: the year of the US dollarThe Dollar Index is attempting again to break bullish out of the very wide range between 88 and 103 it has been trading in since 2015. If the breakout is successful, we could see a move to around 110 in Q3, where we see a cluster of Fibonacci projection and retracement levels.
The RSI is showing bullish sentiment with no divergence, and Bollinger Bands are expanding, supporting the view of higher price levels in the Dollar Index.
US 10-year Treasury yields breaking multi-decade long downtrend—4 percent in sightAn uptrend in US 10-year Treasury yields was confirmed when it broke above 1.71 percent in January 2022, making a new higher high. This was then followed by a break of the multi-decade long falling trend line in March. Yields have now also taken the 2018 peak at 3.25 percent.
With just minor psychological resistance around 4 percent, US 10-year Treasury yields could very well reach the 1.382 Fibonacci projection at around 4.38 percent in Q3. However, there is no strong resistance until around 5.25 percent, which is around the pre-subprime peak between the 1.618 and the 1.764 Fibonacci projection levels from the 2018–2020 downtrend.
Brent crude oil uptrend running out of steamAfter two attempts in May and June, Brent crude oil seems to have trouble returning to above $126 to test the March peak.
On weekly, the RSI is still bullish, but with divergence indicating we have seen a medium-term top. A break above 125.25 could push Brent to test the March peak in a final exhaustive move.
However, Brent oil could be range bound between $97 and $125 for the next couple of months. If Brent breaks below $96.90, support at $86.75 and the rising trend are likely to be tested.
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