Technical outlook: Price bubble implosion in equities Technical outlook: Price bubble implosion in equities Technical outlook: Price bubble implosion in equities

Technical outlook: Price bubble implosion in equities

KCL
Kim Cramer Larsson

Technical Analyst, Saxo Bank

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 equities

The 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.  
Since the subprime crisis bottom in 2008, the Nasdaq-100 has risen fifteen-fold. There have been a couple of larger corrections, most notably in 2018 amidst the US trade war and Fed interest rate hike fears and when Big Tech was under Congress scrutiny, and during the Covid pandemic in 2020.    

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 dollar 

The 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 sight 

An 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 steam 

After 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.  

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.