WARNING: The 20% Correction No One Is Prepared For

Key Concepts

• Wedge Pattern: A chart pattern formed by converging trend lines, suggesting a potential breakout or breakdown.
• Trend Lines: Lines drawn on a chart connecting a series of highs or lows, indicating the direction of a trend.
• Drawdown: A decline in the value of an investment, typically expressed as a percentage.
• Dollarization: The process of countries reducing their reliance on the US dollar as a reserve currency.
• 100-Year Cycle: A cyclical pattern observed in financial markets, linked to the Great Depression and potentially repeating.
• Pivot Points: Significant highs or lows on a chart that can act as support or resistance levels.
• Logarithmic Chart: A chart that scales the y-axis logarithmically, useful for visualizing long-term trends.
• Black Swan Event: An unpredictable event with severe consequences.

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S&P 500 and NASDAQ Analysis: Potential for a 20% Drawdown in 2026

Gareth Solomay discusses the current technical outlook for the S&P 500 and NASDAQ, highlighting potential for a significant correction – a 20% drawdown – by mid-2026. He emphasizes key trend lines and chart patterns that will signal the direction of the market in the coming weeks. The analysis is framed within a broader context of potential systemic risks, including a weakening US dollar and declining foreign investment in US debt.

I. Macroeconomic Concerns & Systemic Risks

Solomay expresses concern over the potential for a breakdown in trust in the US financial system. He cites several factors:

• Dollar Collapse: A previous video detailed the potential for a major breakdown in the US dollar’s value.
• Rising 10-Year Yield: An anticipated spike in the 10-year Treasury yield is expected to contribute to market fear.
• Federal Reserve Independence: The upcoming appointment of a new Fed chairman, potentially handpicked by a future presidential administration (Trump), raises concerns about the Fed’s independence and potential for politically motivated monetary policy. He quotes the potential future president stating a new chairman will only be appointed if they “promise to agree and do what he wants.”
• Dollarization: The ongoing, albeit slow, trend of countries reducing their reliance on the US dollar as a reserve currency, driven by a desire to avoid US influence.
• Declining Foreign Debt Holdings: Foreign countries are significantly reducing their holdings of US debt. Ten years ago, 40% of US debt was held by foreign entities (Japan, China, etc.); now, that figure is only 15%. This indicates a diversification away from US assets.

II. S&P 500 Technical Analysis

The S&P 500 is analyzed using daily charts, focusing on key trend lines:

• Parallel Trend Lines: A clear parallel trend line connects the COVID low, the 2022/2023 bear market lows, and the 2025 liberation sell-off low. This line has historically acted as support.
• Wedge Pattern: A new trend line, drawn from the April 2025 sell-off low, creates a wedge pattern with the existing parallel trend line. This wedge pattern is crucial.
• Breakdown Signal: A break below the white (newer) trend line of the wedge pattern would signal the likely beginning of a 20% drawdown.
• Potential Resistance: A move above the wedge could see the S&P test the 7,000 level, but this would require monitoring for stalling or continued squeezing within the pattern.
• Decision Point: The chart indicates a decision point in February – the lines converge, forcing a breakout or breakdown.
• Target Levels (Breakdown Scenario):
  • First Target: The former high pivot from 2024/2025. This would not represent a 20% drop.
  • 20% Drawdown Target: A lower level would need to be reached to achieve a full 20% correction. A bounce is expected after reaching the first target, potentially followed by another move downwards.

III. NASDAQ Technical Analysis

The NASDAQ is analyzed using both weekly and daily charts:

• Weekly Chart – High Pivots: The weekly chart reveals a pattern of high pivots since 2023, each followed by a market drawdown. The most recent pivot suggests a potential for a larger drawdown.
• Bear Flag Pattern: The current pattern on the weekly chart resembles a bear flag, reinforcing the expectation of a downward move.
• Daily Chart – Wedge Pattern: Similar to the S&P 500, a wedge pattern is forming on the daily chart, defined by trend lines connecting the April 2025 low.
• Decision Point: The NASDAQ’s decision point is earlier than the S&P 500’s – around mid-January.
• Target Levels (Breakdown Scenario):
  • First Target: The high from December 2024/January 2025.
• Potential Resistance (Breakout Scenario):
  • A break above 23,570 could lead to a move towards 24,000, but resistance is expected.

IV. Logarithmic Chart Analysis (NASDAQ)

A logarithmic chart of the NASDAQ, extending back to 1973, provides a long-term perspective:

• Pivot Points & Trend Lines: The logarithmic scale reveals numerous pivot points and trend lines that are currently relevant.
• Potential Upside: A potential move to 25,000 is possible, but the chart suggests a limited upside.
• Extended Upside (Less Likely): A more extended move to 28,000-29,000 is possible if certain conditions are met, but is considered less probable.

V. Timeline and Conclusion

Solomay concludes that key decisions for both the S&P 500 and NASDAQ will be made within the next few weeks:

• S&P 500: Decision by early February.
• NASDAQ: Decision by mid-January.

He reiterates his expectation of a 20% correction in the markets by mid-year, but emphasizes that the near-term direction will be determined by whether the key trend lines break down or break out. He will continue to provide updates on these developments.

This analysis highlights the importance of monitoring these trend lines and being prepared for a potential correction in the stock market. The broader macroeconomic concerns add to the risk profile, suggesting that a significant market event could be triggered by factors beyond technical analysis.