Nasdaq’s bullish momentum stalls as downside risks mount: pause or start of a correction?
FUNDAMENTAL OVERVIEW
The Nasdaq has been surging into new record highs despite the prolonged US-Iran stalemate and the Strait of Hormuz closure. The rally in April was justified by easing US-Iran tensions, the constant push for a diplomatic resolution instead of another full-fledged war and expectations that a deal would be reached eventually.
Now, we are likely approaching an inflection point as from an asymmetric point of view, the near-term fundamentals are turning bearish.
In fact, it wasn’t just the US-Iran de-escalation supporting the stock market, but also the Federal Reserve’s easing bias. This has led to an easing in financial conditions even without rate cuts as real yields fell.
Now there are two main risks ahead: the restart of the war and a hawkish Fed. Yesterday, we had Iranian reports saying that the US would propose a temporary waiver to sanctions. That helped stocks for a bit, but the gains were quickly pared after US officials denied the reports.
Moreover, Trump said on Truth Social that a large-scale military strike against Iran got suspended at the request of Gulf leaders to allow for peace talks to continue. He added that there is a "good chance" of a deal now. Despite Trump’s post, the market failed to rally. This might be a signal of exhaustion.
If we do get an official resolution, the reopening of the Strait could give the Nasdaq another boost in the short-term as oil prices will likely fall and rate cut bets will increase. After that though, the focus will quickly turn back to the Fed and the economic data.
With the end of the war and the reopening of the Strait of Hormuz, the increase in economic activity could keep inflation higher for longer and eventually require rate hikes anyway.
Today, we got the Bank of America Fund Manager Survey where “just 4% of fund managers see a hard landing” ahead. I think that's the strongest signal of too much optimism if you couple it with the "record rise in equity allocations in May". There's too much good news priced into the market.
Although a second wave of inflation is now the biggest tail risk, consecutive Fed rate hikes would be even worse. If conditions in the Strait of Hormuz don't change and oil prices remain elevated, then Fed tightening into such conditions would trigger a crash in the stock market and that's when the hard landing probabilities will start to climb quickly.
NASDAQ TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see the strong bullish momentum has finally stalled. The Nasdaq is now consolidating above the 28,800 level. From a risk management perspective, the buyers would obviously have a much better risk to reward setup around the 26,400 level but we will likely need a more hawkish Fed or an escalation on the US-Iran front to trigger such a major correction.
NASDAQ TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see the price broke below the upward trendline that was defining the bullish momentum since the start of this incredible rally. This consolidation looks like a head and shoulders pattern with the target near the 27,600 level. We can expect the buyers to step in around the 28,800 neckline with a defined risk below it to keep pushing into new highs, while the sellers will look for a break to pile in for a pullback into the 27,600 level.
NASDAQ TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have a minor downward trendline defining the current pullback into the 28,800 support. If we get a bounce around the support, we can expect the sellers to lean on the trendline with a defined risk above it to position for a drop back into the support targeting a breakout. The buyers, on the other hand, will look for a break higher to increase the bullish bets into new record highs. The red lines define average daily range for today.
UPCOMING CATALYSTS
Today, we have Fed’s Waller speaking. Tomorrow, we have the FOMC meeting minutes. On Thursday, we get the latest US Jobless Claims figures and the US Flash PMIs.
This article was written by Giuseppe Dellamotta at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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