Nasdaq Breakout Potential into Q4 for Melt Up Scenarios

Nasdaq 100 Talking Points:

• Going into the rate hike two weeks ago there was a legitimate shot of a larger market sell-off, taken from the fact that the Nasdaq 100 had started to lag behind the S&P 500 since Kevin Warsh’s first meeting at the Fed.
• From the 2022 lows, tech and AI have very much been a driving force. If that begins to shift, particularly as yields fly higher and worries grow of a more-hawkish push at the Fed, the argument for lower stock prices can gain hold.
• In the aftermath of the rate hike, however, we’ve seen bulls come back in a very big way as the Nasdaq 100 set a fresh high, and going into Q4, there’s an inverse head and shoulders pattern that opens the door for a ‘melt up scenario’ that could run into another Santa Rally.

If trading were as simple as riding the headlines, traders would have fewer problems to deal with. And, to be sure, in many instances those headlines can help to shape market behaviors which, in-turn, influence prices. But, this doesn’t happen all the time and for the emotional trader without a plan, guiding decisions on the basis of headline flow, they can be put in the usual position of chasing their own tails.

At this point, the headlines seem dire. The risks are obvious. And, frankly, it can even be difficult to twist all of that into a bullish or optimistic argument. Yet, despite all that, stocks just continue to punch higher.

As we go into Q4 both the Nasdaq 100 and the S&P 500 show bullish potential, even as the Dow and Russell 2000 have lagged behind. Given the rate sensitivity of smaller cap companies, that makes sense for the Russell but the fact that equity buyers have just continued to push into the long side of stocks illustrates that, perhaps, something else is going on, and maybe market participants are looking beyond the current avalanche of risks.

Q4 will be big as mid-terms bring the possibility of change, and at this point, it seems that’s the widespread expectation. Bears have had ample opportunity to run with pullbacks but, so far, buyers have just continued to respond to pullbacks and support, and as we go into the Q4 open tomorrow’ there’s bullish breakout setup showing prominently in the index.

Nasdaq 100 Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Nasdaq Bigger Picture Inverse Head and Shoulders Formation

I looked into this coming into this week, highlighting the fact that the index had recovered into another bullish breakout formation, this time, an inverse head and shoulders pattern. Such formations come with projected moves and those are usually calculated based on the distance from the bottom of the head up to the neckline, and in this case, it points to the possibility of a breakout into a rally to just under the 35k level.

I highlighted this in this week’s 5 Charts for the Week Ahead Video

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Granted, it may seem outlandish at this point as that is a little more than 12.6% above current prices. But consider the fact that there’s been so many bearish items and as we go into Q4, a bit of relief in either oil prices or Iran or Treasury rates could serve as catalyst for a breakout.

Nasdaq 100 Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

Shorter-Term Structure

At this point there’s a few different spots of interest for higher-low supports along with a pretty clear line-in-the-sand for invalidation, taken from a level that’s so far held three different tests. That price is at 30,370 and if sellers are able to break through that, then something has shifted.

But for bulls working pullbacks, ideally, buyers would show up to provide higher-low support at either the 30,722 zone or the 30,557 area, both of which have some prior reference with support/resistance swings.

Nasdaq 100 Two-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro