S&P 500, Nasdaq, Dow Forecast: Bears Take a Shot but Stumble at Support

S&P 500, Nasdaq, Dow Talking Points:

• It was an indecisive outlay from the weekly bar in the E-Mini S&P, but the fact that bulls had difficulty driving despite a seemingly bullish backdrop is a notable item.
• The rotation theme continued as Nasdaq 100 futures printed a red weekly bar while backing further down from the 20k level, but Dow futures have remained strong and set a fresh ATH this week, with continued breakout potential for the week ahead. The NVDA reaction is also notable which I’ll extrapolate on below.

It was a positive week for stocks if we look purely at the headlines, but price action has started to tell a different story. Perhaps disconcertingly, the high-flying tech stocks that led the charge-higher from the Q4 2022 lows have been on their back foot, even as the Dow has continued to surge. A lot of what I’ve read across the media has exalted this fact as an expansion of the rally, a sign of a more broad-based bullish move to come as the Fed moves into a cutting cycle.

But rotation away from higher-beta stocks isn’t necessarily a direct spell for stronger equity markets. And FOMC rate cuts aren’t always a bullish factor for stocks, as it can also cause a rally in Treasuries which can draw capital from riskier asset classes. When stocks began to turn around the Fed’s introduction of rate hikes in 2022, the Nasdaq led the way lower, topping in November of 2021. Both the S&P 500 and Dow set highs after the 2022 open, but the S&P had a bit more velocity as the turn began, dipping by as much as -12.38% in January of that year while the max move-down in Dow futures was -10.32%.

At this point we’ve merely seen pullbacks that started in July but the response to that has been intense, with the S&P 500 gaining a whopping 10.65% in a little over two weeks. And since then, sellers haven’t had much luck as price has continued to grind for the past couple of weeks, building in a consistent range. That’s not to say that they haven’t taken their shots because they have – and last week showed a strong sell-off around the NVDA earnings announcement that saw ES test the bottom of the support zone that I’ve been tracking at 5562.50.

A strong response followed and by mid-day on Thursday the index had added more than 100 points, returning to the same 5664 level that had stalled buyers twice already. And, again, it played in as resistance, with a fast sell-off developing down to 5600, at which point buyers came back and bid the market to resistance at 5643.75 before another 5600 test.

I followed these levels throughout the week in daily reports on S&P 500 futures, highlighting these same levels.

S&P 500 30-Minute Price Chart

S&P Bigger Picture

The daily chart shows this recent grind well and it also highlights a reason why it may be happening. Just above resistance at 5664 is a zone around the all-time-highs, the same 5700 zone that had stalled the advance in July before sellers ultimately took a shot. And that did lead into some panic, as we saw the third-highest VIX spike ever recorded, behind only the introduction of Covid and the Financial Collapse.

But bulls slowly started to get back in the driver’s seat and with some help from positive US data, were able to push back towards the prior all-time-high.

The question now is whether the backdrop is befitting of continued bullish trends beyond that 5700 zone and that’s going to remain an open question. If the economy looks very weak, as it started to look at the August NFP report, that could compel a bull run in Treasury notes as markets begin to price in more and more rate cuts. This would be a ‘bad news is bad for stocks’ theme that started to take over during the July sell-off.

But, if data comes out stronger, it becomes more difficult to justify the three rate cuts that the Fed is expected to push into the end of the year, which similarly could be a negative for equities.

So, at this point it seems the path higher would need to be driven by a ‘goldilocks’ outlay on the data:  Not too weak so as to fire recession fears but not too strong to begin questioning the Fed’s rate cut plans.

On that front, I expect a bit of struggle if the S&P 500 is to soon re-test the ATH at 5721.50. The current gyration could be a limiting factor to that as bulls have had opportunity to take profits after the strong rally from the August lows.

But, if looking for bearish scenarios in US equities, the Nasdaq may be a more attractive spot which I’ll look at below. And if looking for strength, the Dow is on the verge of a big-picture breakout and bullish equity strategies may be more accommodative there.

S&P 500 Daily Price Chart

Nasdaq 100

While the S&P is close to that all-time-high and the Dow has technically set a fresh one last week, the Nasdaq 100 remains well below its own.

But what’s interesting to me here was the reaction to NVDA earnings, which weren’t bad by any stretch. On top of an earnings beat the company announced a whopping $50 billion buyback, which one would think would be seen as a sign of strength for the stock that’s gained as much as 1,200% from the October 2022 lows – in less than two years.

While NVDA will be buying its stock back in the open market very near all-time-highs, at a price-to-sales ratio of near-37 (as comparison, AMD PS ratio is closer to 10 and that’s still elevated by almost any standard), CEO Jensen Huang is and has been selling his own stock. The amount that he’s selling pales in comparison to the amount that NVDA is buying, but it doesn’t make sense that the CEO would be diversifying away from his holdings while the company is doing the opposite. Given the demand that NVDA claims to have for Broadwell, capital expenditures would seem to make a bit more sense as a pragmatic use of those funds.

Nonetheless, it’s the market reaction that’s of interest for me and as the old saying goes, ‘when a stock falls on good news, look out below.’ That implies an overbought, one-sided market and given the run that we’ve seen of as much as 1,200%, that makes sense. But – it would also imply that most market players willing, able, and wanting to buy NVDA have been tapped and there may not be much more capital on the sidelines to chase the stock higher.

As a case in point, during the July-August sell-off, NVDA dropped by -35.57% in six weeks. It tested below the 100-level but that didn’t last long, as buyers came back and prodded a massive rally back to the 130-level. But, as seen above with the S&P 500, as stocks re-approached those prior highs bulls started to get cautious. And in NVDA, a sell-off took over even after a seemingly positive backdrop was on display from the earnings announcement on Wednesday afternoon.

NVDA Daily Chart

Nasdaq 100 Daily

If we are on the cusp of a bearish turn in stocks, the Nasdaq looks more attractive for that scenario, in my opinion. The 20k level has so far held lower-high resistance after the bullish reaction in early-August, and while the S&P 500 has shown horizontal grind, NQ has had a bearish bias over the past couple of weeks since that failed breakout at 20k. The 50% retracement of the sell-off held the lows shortly after the Thursday evening open; and the 61.8% Fibonacci retracement came into hold resistance into the end of the week. I’m tracking that as part of a zone running up to 19,728 and a hold there through early-trade next week keeps the door open for bearish swing setups.

Nasdaq 100 Daily Price Chart

Dow

On the other side of the matter, for those that are bullish equities, Dow futures can make a stronger case for topside scenarios. While the S&P has stalled just shy of the prior all-time-high and the Nasdaq 100 has set and held lower-highs thus far, the Dow has technically already broken through its high-water mark and as of this writing, holds a V-shaped recovery from the August lows.

Dow Futures – Daily Chart

Dow Shorter-Term: Key Support

At this point support for the Dow held through last week at a zone of prior resistance. I’m tracking this from 41,233-41,427 and this was the area that held lower-highs in late-July just before the sell-off took over again. That area had stalled the advance through last week’s open, but it became resistance after the Wednesday sell-off and is now a case of support at prior resistance. This is the zone that bulls need to hold to retain control and keep the door open for a push up to another fresh ATH.

Dow Futures – Four-Hour Chart

--- written by James Stanley, Senior Strategist