The Nasdaq has Broken Above the 61.8 Fibonacci! What's Next?
My students and followers have been awaiting for a lower high swing on the weekly charts for the US equity markets. Fibonacci is a great tool to use to determine where price MAY react to give us a sell off. However, there are other criteria we look for in order to actually confirm the lower high and a move lower. None of this happened with the test of the 38.2 and the 50 fibonacci levels. Sure, market structure does dictate that we should see a swing as markets do not move in a straight line during a trend. But we trade the markets we see, not the markets we hope to see.
Since the weekly candle has now closed above the 61.8 fibonacci level. according to fibonacci rules, the downtrend is now nullified and we should not be looking for a lower high to form. It would take another black swan event to cause a large fall from here.
On the daily chart, the Nasdaq is still at a key resistance zone:
What is so key here? Well the area we are testing is first of all a large flip zone (an area that has been both support and resistance in the past). Secondly, this is the higher low that we broke below which ended the infamous bull market we have been in until recently. You can see that so far price is rejecting this zone, but this does not mean much yet. We would like to see a pattern form here before shorting this market.
It is worth to point out that the other equity markets, the S&P and the Dow Jones have NOT yet tested the 61.8 fibonacci on the weekly charts. They are at key flip zones on the daily chart just as the Nasdaq:
So why has the Nasdaq been leading? Two words: Amazon and Netflix. Both stocks are now at all time record highs. One can see why these companies would do well during lock downs. Amazon providing a service where one can order essential items without having to leave the house, and therefore, one can stay home to binge Netflix.
One other thing that tech has for it, is the fact that most of these companies will not require government money in order to survive and keep employees on the payroll. Their employees can for the most part, continue working from home. In the case of Apple, yes their stores shut down for sometime, but they had the cash to weather it, and they did announce a new phone. Innovation can continue.
As an investor, tech provides value. If you think the world will continue on and technology will improve, then some of these companies look very attractive with the general stock market sell off. For the long term, it is worth dipping your toes into these markets. Some have already been well rewarded.
So where are stocks going to head here? Still sensing a lot of fear. Lot of new developments on the virus side. Countries wanted to shut down for months, but are now re-opening as soon as May 1st. Some European nations are already re-opening, and Germany will be set to do so on this upcoming Monday.
What will be required is some sort of successful treatment. People are still afraid of each other. Only a vaccine, or a successful treatment will ease fears and society can get back to normal. This is a big thing that must happen for normalcy.
Both of these news would be stock market positive. Economies re-opening, and a treatment being developed. Now just imagine the first week of the full re-opening. The euphoria. People are going to be spending tons of money. Bars and clubs and malls are going to be packed. You can bet the mainstream media will be touting about how the recovery is coming. However, we must keep our attention on the debt. This will eventually lead to a debt and monetary crisis. This is next, and what I have been warning about. Central banks around the world are issuing more debt and are attempting to inflate (devalue) their currencies to keep things propped up.
Before we get to the implications of the currency crisis, I want you to all put yourself in the shoes of a fund manager. Be it a mutual fund manager, or a hedge fund manager. Pretend you are looking at your Q1 performance. You are likely to see red. Now your job is on the line. You are paid to bring in yield. You are now preparing for Q2 and how to make money. Where do you go? Many think Bonds. You need to realize what has happened to bonds in less than 2 months. The world was a totally different place before central banks cut interest rates close to 0. If you want to keep your money in bonds for a month or three months, you are now yielding less than 0.15%. This is where Ray Dalio’s Gold case comes into play. It does not make sense to be in bonds for short term safety, or for yield. The only reason to be in bonds is to trade them for capital appreciation if you believe negative rates are coming. You would rather be in dividend paying stocks for yield now, or Gold. If you want safety in the short term, why hold short terms bonds for less than 0.15%? Why not just buy Gold where you actually stand a chance to make more than a 2% yield holding it per month.
Stocks remain the only place to go for REAL yield, that is nominal yields adjusted for inflation and taxes. Money will eventually flow back into stocks because there is nowhere else to go for making money. All that is required is for the fear to subside.
A quick note on the US Dollar. I still believe the Dollar is going higher due to this upcoming currency crisis. But stocks will play a part here too. A lot of money will want to run into US stocks, which are making bigger moves than European and other markets. Money will need to buy US Dollars in order to buy US stocks. There will be a surge of foreign money running into the US. This will be key for the currency crisis going forward.
If you follow my work on my social media, my blog, and/or my tradingview page, I have posted bottoming charts for the equities. We have been trading equity markets long on the 4 hour charts these past few weeks. We will keep our eyes on these key levels on the S&P, the Nasdaq and the Dow Jones. It is probable that we do test the 61.8 fib on the weekly charts for the S&P and Nasdaq. Have said this so many times recently, but be set for another important week ahead.
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