S&P 500 & NASDAQ Breakdown: The 15% Drop No One Sees Coming

Market Analysis: Potential Breakdown in S&P, NASDAQ, and Dow – Gareth Soloway (Verified Investing)

Key Concepts:

• Parallel Channel: A technical analysis pattern formed by two parallel trendlines, often indicating potential support and resistance levels.
• Negative Divergence (RSI): A bearish signal where price makes higher highs, but the Relative Strength Index (RSI) makes lower highs, suggesting weakening momentum.
• Breakdown: A price movement below a key support level, often signaling the start of a downtrend.
• Retrace: A temporary reversal in a downtrend, often to a previous support level now acting as resistance.
• Pivot Low: A significant low point on a chart, often acting as a support level.
• Institutional Selling: Selling pressure from large investors (institutions) potentially driving down prices.
• Failed Breakout: A price movement that initially breaks above a resistance level but then reverses, often leading to a significant downside move.
• Capex: Capital Expenditure - funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

I. S&P 500 Analysis

Gareth Soloway highlights a concerning pattern in the S&P 500. He points to a parallel channel formation where the market has repeatedly rejected the upper trendline after initially tagging it. This rejection, reminiscent of a similar pattern in 2021 that preceded a market drop, suggests a potential bearish reversal. Specifically, the S&P has failed to revisit the lower trendline of the parallel channel after making a slightly higher high, indicating weakening upward momentum.

A key breakdown occurred on the daily chart, breaching a trendline established from the April 2023 low. The S&P experienced a 44% rally from that low to its all-time highs in under a year, but the subsequent breakdown of the trendline signals a potential shift in market direction. While a temporary bounce occurred following the retraction of threatened tariffs against European nations, the market failed to regain lost ground, suggesting underlying institutional selling pressure. Investors are using retail buying on dips to offload their positions.

Furthermore, a negative divergence is observed on the weekly RSI (Relative Strength Index). While the S&P made a higher high, the RSI made a lower high, indicating a weakening uptrend and reinforcing the possibility of a breakdown.

II. NASDAQ 100 (QQQ) Analysis

The NASDAQ 100 mirrors the S&P’s bearish signals. The daily chart shows a breakdown below a trendline originating from the April 2023 lows, confirmed by multiple tests and subsequent failure to reclaim the trendline. Soloway anticipates a “breakdown, retrace to the scene of the crime, and then rejection,” suggesting a further decline.

He identifies a major support level around a previous pivot low on the NASDAQ 100, anticipating a bounce at that point. However, he believes the primary support lies even lower.

III. Dow Jones Industrial Average Analysis

The Dow Jones Industrial Average presents a slightly different picture. A long-term trendline, dating back to October 2023, was finally broken, with price consistently rejecting the level after the breach. Soloway expects a potential bounce around the 45,000 level, representing a roughly 10% drawdown.

He contrasts the Dow’s expected drawdown with the NASDAQ’s potential 15% drop, explaining that the Dow is a more defensive index comprised of lower PE (Price-to-Earnings) stocks, while the NASDAQ is dominated by high-growth, high-valuation technology companies. Therefore, the Dow is expected to experience a less severe decline in a risk-off environment.

IV. Russell 2000 Analysis & Leading Indicator

The Russell 2000 is identified as a potentially leading indicator. It initially broke above its trendline but then formed a “topping tail” (a bearish reversal pattern) and is now falling sharply. The Russell is currently down 1.75%, the most of any of the indexes discussed.

Soloway emphasizes that failed breakouts often lead to the largest moves, and a failure to hold above the trendline could signal a significant downside move, potentially exacerbated by a recession impacting small-cap companies disproportionately. He states, “the biggest moves come from failed moves.”

V. Economic Context & Recessionary Concerns

Soloway links potential market weakness to the broader economic landscape. While GDP remains strong, driven largely by capital expenditure (Capex) in Artificial Intelligence (AI), other sectors of the economy are stalling. He argues that a slowdown in AI spending could trigger a recession. He notes a “stagnant jobs market” outside of the AI sector.

VI. Notable Quotes

• “The biggest moves come from failed moves.” – Gareth Soloway, emphasizing the significance of the Russell 2000’s failed breakout.
• Regarding institutional selling: “…they were basically using the retail investor buying the dip to essentially get in a position to dump into that.” – Gareth Soloway, describing a potential dynamic in the market.

VII. Data & Statistics

• S&P 500 Rally: 44% move from April 2023 low to all-time highs.
• Russell 2000 Decline: Down 1.75% (as of the video’s recording).
• Potential Dow Drawdown: Approximately 10% to 45,000.
• Potential NASDAQ Drawdown: Approximately 15% from all-time highs.

Conclusion:

Gareth Soloway presents a bearish outlook for the S&P 500, NASDAQ 100, and Dow Jones Industrial Average, citing broken trendlines, negative divergences, and potential institutional selling pressure. He highlights the Russell 2000 as a key indicator, warning that a failed breakout could foreshadow a more significant market decline. The analysis suggests investors should be prepared for a potential correction, with specific support levels identified for each index. The overall message is one of caution, emphasizing the importance of recognizing weakening momentum and potential downside risks in the current market environment.