S&P 500, Nasdaq, Dow Jones Forecast: Stocks Stumble After Rate Cut Rally

S&P 500, Nasdaq, Dow Talking Points:

• The week opened with strength in the S&P 500 but bulls were unable to take out the ATH, leading to a pullback with support holding at the familiar 5674.50 area.
• The Dow similarly ranged after last week’s ATH print and the net result there was a dragonfly doji.
• It was also a doji week in the Nasdaq although context remains important, as the 20k level held resistance and this marks another lower-high, inside of the prior week high which is inside of the July high. As I looked at in the equity forecast for Q4, bears may find more attraction to the current setup in the Nasdaq as opposed to the Dow or S&P that have both set recent ATHs.

I wrote a lengthy forecast for Q4 to explain my rationale behind my stance in equities. If you’d like to read that, clicking the above image will set up access. In short, I’ve remained bullish for Q4 which meshes with my stance for the past four quarterly forecasts. It’s been easy to be bullish since the Q4 installment in 2023, when equities were looking like they could possibly melt down. As I wrote then, I fully expected the Fed and Treasury to try to prod prices-higher as much as they could, and I expected a large Santa Rally to show even if the FOMC wasn’t yet in a position to cut rates, or even discuss such.

In the quarterly forecasts that have followed the big challenge has been trying to avoid chasing, so in both Q2 and Q3 I remained bullish while highlighting pullback potential and, sure enough, it was after the three-week pullback at the start of Q2 and the four-week pullback in the middle of Q3 that conditions were most attractive for equity gains.

I’m in a similar spot now:  While I do think equities close Q4 higher than they started it, I’m not a fan of chasing at this point even with a softening rates backdrop around the Fed. I’m not going to call of a full-scale reversal or sell-off however, especially in a quarter with a Presidential Election taking place. But, to be sure, there is motive for looking for a pullback as equities have not been able to show much on the long side since the Fed’s rate cut from three weeks ago.

As for drivers we’ve heard more of the same from the Fed. They’re dovish and they want to cut rates, by and large, and that much is clear. The bigger question now is whether the data will allow for such but even with Core PCE moving higher for the first time in a year and a really strong NFP report, the only debate seems to be about how much the FOMC can cut rather than will they hold back from any additional moves of softening until the data says that it’s safe to go ahead.

To be sure, there are risks and possibly even hints of change. The leader has become the laggard with the Nasdaq under-performing both the S&P 500 and the Dow. While many will proclaim that rotation is a sign of a healthy equity market, divergence isn’t always a bullish indication, especially when the bulk of the move was driven by seven single stocks with ties to a highly speculative technology which, we don’t really know where it will be a large revenue driver.

We will get a peek at that next week with Tesla’s unveil of the Robotaxi. To date, Tesla is one of the foremost American companies at implementing AI in a practical purpose rather than just an enhanced search engine; or a parlor trick such as the Meta AI smart glasses or the Microsoft Co-Pilot feature.

Nonetheless, the Fed wants ‘stability’ in equity markets as the election approaches so I’m not expecting any drastic takes from the FOMC, even if next week’s CPI data comes out hot. I am, however, looking for pullbacks and in the S&P 500, there’s a very clear area for which something like that could happen.

S&P 500

The S&P 500 gapped-up the day after the rate cut and then pulled back to set support around the prior ATH a day later. That spot on the chart remains key, and the swing low from that was back in the picture this week to set the low on Wednesday. So far bulls have continually shied away from 5,800 and there’s been a refusal to fill that rate-cut driven gap on the chart, which runs down to the closing level from the day of the rate cut at 5618. This is what I’m following as my current ‘s1’ zone of support on the index and a test inside of that area, with a hold and, preferably, an underside wick highlighting reaction, keeps the door open for bullish continuation setups for the S&P 500 next week.

S&P 500 Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

Nasdaq

If looking for a deeper pullback scenario, I think the Nasdaq remains a more attractive venue. While the S&P 500 set a fresh high after that rate cut that prices are struggling to break-through now, the Nasdaq hasn’t yet taken out that pre-rate cut high, and the 20k level has continued to offer some level of resistance.

It’s also notable that the ATH in the Nasdaq, at this point, is at the 161.8% extension of the 2022 pullback. And the 127.2% extension of that move gave resistance in early 2023 trade before becoming support in Q2 and again in September.

That’s what I’m watching as my ‘s1’ zone of support there, which plots around 18,485. If that can’t hold and a deeper pullback does show, it’s the prior ATH at 16,765 that has my attention and currently functions as my ‘s3.’

Nasdaq Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

Dow Jones

The Dow appears to be the most attractive of the three indices discussed in this article for bullish continuation scenarios. To be sure, with rates falling the dividends offered in Dow equities do become more attractive and this is one of the arguments of the camp dismissing the underperformance of the Nasdaq.

It’s also the index with the strongest technical backdrop since the rate cut and last week was defense of the same 161.8% extension of the 2022 pullback that has capped the Nasdaq so far in 2024.

Given the hold at the prior low of 41,859 there’s also now a bullish formation that could come into play in the form of a double bottom formation. The neckline plots at 42,628 and provides for 769 points of distance from bottom to neck. If that high is traded through, the formation is triggered, and that bullish breakout scenario would keep open the door for topside continuation setups.

Dow Jones Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist