What’s Next for QQQ: Super Bullish to Super Bearish

Exactly how long is this raging bull market driven by mega-cap growth stocks supposed to last? I was taught that, when price trends higher over time, there would often be brief countertrend pullbacks along the way. Apple (AAPL) has completely ignored that market truism and managed to ride this unrelenting ascent to above the definitely-not-frothy three trillion market cap.

At some point, I would expect that this persistent market incline will take a pause and allow some other sectors to take over in the leadership role. It's worth noting that cyclical sectors, like Energy and Materials outperformed the growth sectors this week, which could be an early sign of a further rotation.

So what's next for the Nasdaq 100? Further upside to all-new highs as the FAANG stocks continue their dominance, or a steep correction that forces us to have the "will we retest the October 2022 lows" conversation when we end the third quarter?

Did you miss our webcast this week, "The Market Top Checklist Revisited"? We shared our seven steps to watch for to confirm a potential market top and compared current conditions to previous bull market cycles. You can still access the replay through the end of next week!

Here's a basic daily of the QQQ, including a simple Fibonacci framework using the November 2021 all-time high and the October 2022 low.

After pulling back from the 38.2% Fibonacci level in February, the QQQ pushed back above this resistance level and continued much higher. In the last six weeks, the Nasdaq 100 has now pushed above the 61.8% retracement level and is once again threatening to make another new high for 2023.

I feel these Fibonacci levels, along with the key support and resistance levels established over the last 18 months, provide a good structure with which to consider these four scenarios in the coming months.

Back in early June, we introduced the concept of probabilistic analysis and explained the benefits of considering four potential scenarios for the S&P 500 index. By thinking through four different future paths, it can help you to better anticipate what comes next and be way better prepared for the unexpected.

Today, we'll focus on the tech-heavy Nasdaq 100 index and present four different pictures of how the next six to eight weeks will play out. And remember, the point of this exercise is threefold:

Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.Decide which scenario you feel is most likely, and why you think that's the case. Don't forget to drop me a comment and let me know your vote!Think about each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let's start with the most optimistic scenario, where the Nasdaq would make a new all-time in the third quarter of 2023.

Scenario #1: The Super Bullish Scenario

The QQQ spent pretty much all of May and June in strong uptrend phase. This most bullish scenario would imply that the recent trend just continues on unabated. Given a similar trajectory, that would push the Nasdaq to a new all-time high by the end of August.

Leadership stocks like META and AAPL would have to push even higher, and we'd soon be talking about the next stock to hit the $3 trillion market cap threshold. Other sectors like Industrials and Materials would need to start participating as well, as the market presses the long side and the strongest names get even stronger.

Scenario #2: The Mildly Bullish Scenario

What if the uptrend continues, but just at a much slower pace? Or there's a 5-10% correction as investors take profits and initiate a pullback down to that 61.8% retracement level around $346?

The second potential scenario would most likely involve leading growth stocks to take a big-time breather, as a rotation to other sectors is good for those sectors but not as good for our heavily-growth-tilted benchmarks. We'd still call this a bull market, but a much less exciting one.

Scenario #3: The Mildly Bearish Scenario

The next option is a decline, but not an overly painful one. What if a pullback starts to really take hold, and that Fibonacci level around $346 fails to stop the decline? If investors really get anxious, I could see deeper retracement, which brings the whole "bull market" thing into question.

This scenario would probably mean that the growth leadership pulls back, but also there's a broader rotation to more risk-off positions. Defensive sectors like Consumer Staples and Utilities would thrive as the AI-driven growth trade is declared over and done.

Scenario #4: The Super Bearish Scenario

You always have to consider a really negative scenario, if only to provide a stark contrast to the most optimistic options. But it is theoretically possible that we've seen the top for 2023. What if that was it, and we have some five-standard deviation event that drops the market into a free fall?

If this AI-driven rally ends up being a massive bubble which pops colossally in the next few weeks, then we could be talking about a potential retest of the 2022 lows. Investors would flock to gold and treasury bonds as literally nothing else seems like a good option here.

Okay, so have you decided which of these four potential scenarios is most likely based on your analysis? Head over to my YouTube channel and drop a comment with your vote along with why you see that as the most likely outcome.

And don't forget to think through all the other scenarios as well. The goal here is not just to "be right", but to force yourself out of any preconceived biases and open your mind to different possibilities!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.