Market update: Signs of fatigue on Wall Street

Relatively bigger down days than up days since late July on the daily charts of the Nasdaq 100 index and the S&P 500 index’s fall below support for the first time since April suggests the rally in US indices could finally be due for a breather.

Fitch’s downgrade of US credit rating and higher-for-longer rates following strong US private payroll data appear to be the catalysts for the setback in risk appetite.

However, conditions have been getting ripe for at least some consolidation, as highlighted in recent updates.

Despite upbeat US quarterly earnings so far and resilient economic growth, US indices have struggled recently. Extreme optimism, overbought conditions, overcrowded positioning, and poor Q3 seasonality appear to be gradually casting a shadow over the rally. Having said that, it wouldn’t necessarily imply a reversal of the broader uptrend – the rally could well continue.

However, from a risk:reward perspective, the bar for sustained gains seems to be rising.

Market diversity as measured by fractal dimensions appears to be low. When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of at least a pause/reversal. For the Nasdaq 100 index, the 65-day fractal dimension fell below the threshold of 1.25, flashing a red flag.

Nasdaq 100 daily chart

Nasdaq 100 240-minute chart

Nasdaq 100: Risks minor retreat

On technical charts, the Nasdaq 100 index’s rally appears to be losing steam as it tests an immediate cushion at the 15,285-15,385. Also, as noted in a recent update, monthly charts have been feeble compared with the 50% rally since October (see the monthly chart).

The strength in upward momentum on the daily and weekly charts perhaps masks the anemic conditions on the monthly charts.

Granted, price action is still unfolding - and there is no reversal of the broader uptrend yet.

However, a failure of momentum to rise on higher timeframe charts would be a sign that the rally since last year was corrective (as part of the broader correction that started in 2022), and not the resumption of the long-term bull market. Any break below 15,285-15,385 could expose downside risks toward 14,500.

Nasdaq 100 monthly chart

S&P 500: Breaks below minor support

S&P 500 index’s fall below minor support at the late-July low of 4550 raises the odds of at least some consolidation/minor retreat in the short term – a risk highlighted in late July. This follows a failure to rise past converged resistance on the upper edge of a rising pitchfork channel from the end of 2022 and the April 2022 high of 4637.

The index could fall toward 4400-4415, including the 89-period moving average and the lower edge of the Ichimoku cloud on the 240-minute charts. That could restrict the downside for now given the still-strong momentum on the weekly charts.

From a trend perspective, as highlighted in recent updates, the trend in the Nasdaq 100 index and the S&P 500 index’s trend remains up. However, the indices may need to consolidate before the next leg higher.

S&P 500 240-minute chart

S&P 500 monthly chart

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