- Traders eye US employment data this Friday for clues on the Fed's rate cut plans.
- With stocks near overbought levels, weakness could persist heading into a crucial NFP report tomorrow.
- The Nasdaq 100 faces critical support levels that could determine the next move.
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The US stock markets are closed today in observance of a national day of mourning for former President Jimmy Carter. Futures markets remain open but have shown little movement so far.
What will traders be watching this week?
This Friday, all attention turns to the US employment report, expected to provide insights into the economy and the Federal Reserve's potential interest-rate trajectory. Currently, traders are anticipating just one 25 basis-point rate cut this year—a more cautious stance compared to the two cuts Fed officials suggested in December.
Risk sentiment has faltered a little in recent days, partly due to continued selling in fixed-income markets, causing yields to rise, and reports indicating President-elect Trump is considering declaring a national economic emergency to introduce new tariffs.
Rising yields make growth stocks less attractive, just as concerns about stock valuations are on the rise.
Valuation concerns on the rise
As per Bloomberg's analysis a couple of days ago, US stocks are nearing their most overvalued levels relative to corporate credit and Treasuries in nearly 20 years, based on the earnings yield. This metric assesses how much profit companies generate relative to their stock prices and compares it to the yield investors earn from bonds.
Currently, the S&P 500's earnings yield stands at 3.7%, marking the lowest level compared to Treasuries since 2002. In relation to the 5.6% yield on BBB-rated dollar corporate bonds, stocks are approaching their lowest comparative level since 2008.
Historically, when equity yields fall below bond yields, as seen since the early 2000s, it often signals challenging times ahead for the stock market. However, so far, we haven’t seen any major signs of weakness on Wall Street. Could that change this year?
Nasdaq 100 technical analysis
From a technical perspective, the Nasdaq 100 has shifted to a neutral stance over the past couple of weeks, though its long-term trend remains bullish. In the short term, further weakness is possible, but bears must act decisively to gain control.
- Nasdaq daily chart
Recent weeks’ loss of bullish momentum has led to a break in the Nasdaq’s bullish trend line established in August, as reflected in the daily futures chart shown above.
The index has also fallen below its 21-day exponential moving average, signaling a bearish near-term outlook. However, the support zone between 20,980 and 21,340 remains intact for now. This zone, marked in grey on the chart, corresponds to previous highs from July and November. A break below this critical area could open the door for further bearish moves.
Should the support fail, the next downside targets include the 38.2% Fibonacci level at 20,487, followed by the 19,700 to 20,000 range. The 200-day moving average sits near the lower end of this range, reinforcing its significance.
On the upside, resistance comes in at 21,800, which aligns with Tuesday’s high and the backside of the broken trend line. A close above this level would signal a bullish scenario.
- Nasdaq Monthly
The long-term Nasdaq chart remains bullish but technically overbought. The RSI has been above the 70 threshold for months, which may necessitate a correction or extended consolidation.
Resistance from the upper trend line of a rising-wedge pattern adds pressure. In December, the index briefly breached this trend line before closing below it, forming an inverted hammer candle—a potentially bearish signal that requires confirmation through downside follow-through, which has yet to materialize.
Support near the 21,000 level (20,983) has held, marking a key area to watch. If this support gives way, a correction lasting several weeks or months could ensue, potentially finding support from the wedge’s lower trend line, over 1,000 points below current levels. On the monthly chart, this would represent a modest pullback.
Weekly candles as shown in the inset also reflect indecision, with long wicks on both sides and small bodies. While upper wicks suggest traders respect the resistance trend line, lower wicks point to mild dip-buying, indicating a cautious but persistent bullish sentiment. Something has got to give.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.