Bulls Dominate but Pullback Looms, Bearish Signals to Watch

NASDAQ 100 FORECAST

Most Read: Nasdaq 100 Pulls Off Epic Breakout, Rockets to New 2023 Highs, Defying Gravity

The Nasdaq 100 has risen aggressively in 2023, clearing one technical resistance after another and defying expectations despite numerous challenges, including slowing economic activity, rising rates and sticky inflation.

Gains have been driven by the global “artificial intelligence” frenzy. Companies developing AI technology or supplying hardware for their creation, such as Microsoft, Alphabet and Nvidia have reaped big rewards, whereas those with limited or no exposure to this space have lagged.

In this context, megacap tech has been the main source of strength. To show this, we plot the capitalization-weighted Nasdaq 100 (NDX) against the equal-weighted benchmark (NDXE). The former is up 27.3% this year, versus 14% for the latter.

Nasdaq 100 Market-Weighted vs Nasdaq 100 Equal-Weighted

Source: TradingView

The chart above shows market breadth has been weak, with a few heavy hitters skewing results and masking softness beneath the surface, a big red flag. For a rally to be durable and sustained, strong participation is usually required. This has not happened this year.

Another troubling development is the disconnect from the bond market. In recent weeks, traders have begun to price out rate cuts for the second half of the year that were discounted after the banking sector turmoil that erupted in March, sparking a furious rebound in yields.

The Nasdaq 100 has shrugged off the interest rate expectations’ repricing, powering through and reaching its best levels since April 2022. This is not sustainable.

Nasdaq 100, Fed Funds Futures Implied Yields and Treasury Yields Chart

Source: TradingView

From a technical perspective, the Nasdaq 100 is clearly in an uptrend, with prices setting higher highs and higher lows impeccably. However, caution is warranted as the market appears stretched and overbought according to the 14-day RSI. The last four times this indicator reached extreme overbought readings near or above 70, a sell-off ensued shortly thereafter. If history is a guide, sellers may soon regain the upper hand.

To have more confidence in the bearish thesis, a more compelling technical signal is required. One potential cue could come from a breach of 13,750 (breakdown of support). If this floor caves in, sellers may become emboldened to launch an attack on trendline support at 13,350. On further weakness, the focus would shift lower to the 50-day simple moving average.

NASDAQ 100 TECHNICAL CHART

Nasdaq 100 Futures Chart Prepared Using TradingView