The Nasdaq 100 was established in 1985 and currently comprises the stocks of the biggest 100 non-financial companies listed on the Nasdaq exchange. Even though it includes retailers, telecoms and consumer staples, in recent years the index has become a proxy for the performance of the information technology sector. That’s because the eight largest companies of the Big Tech family has a nearly 40% weight in it.
It wasn’t always like that, though. There was a time when Apple, the largest constituent of the Nasdaq 100, wasn’t the world’s most profitable company. In the aftermath of the Dot-com bubble, the stocks of Amazon and Microsoft were in the doldrums and Meta Platforms, formerly Facebook, wasn’t even founded yet. These are some of the names most responsible for the big gains in the Nasdaq 100 over the past two decades. It is fair to say that for a selected few, the internet revolution really was, despite the initial boom and bust in the 1998-2002 period.
Alas, if studying history was what it takes to make money in the stock market, most investors would be librarians. The phenomenal gains the Nasdaq 100 made after its 2002 bottom are now in the past. It is the future that counts. So let’s take a look at the index’s history through the lens of the Elliott Wave principle. It might just give us a hint of what lies ahead.
The weekly chart of NDX above reveals the index’s entire uptrend since the early-1990s. What immediately caught our attention was the fact that it looks like a textbook five-wave impulse pattern. We’ve labeled it I-II-III-IV-V, where wave I culminated in the Dot-com bubble, followed by the Dot-com crash in wave II. Wave III was a wonder to behold, lifting the index from 795 in October, 2002, to 16 765 in November, 2021.
Wave IV coincided with the inflationary crisis, which the Federal Reserve both caused and fought in 2022. It came to an end shortly after touching the 38.2% Fibonacci support level. If this count is correct, the rally we saw over the past twelve months must be part of the fifth and final wave V. Fifth waves exceed the top of the corresponding third wave in 99% of the cases, so we can soon expect a new all-time high. Upside targets near the 18 000 mark seem plausible in the short-term.
Once there, however, the impulse pattern, which began in 1985, would be complete. According to the Elliott Wave theory, a three-wave correction should follow. Corrections usually erase the entire fifth wave and then some. This translates into a drop back to the support area near 10 000. Assuming a bearish reversal near 18 000, that would be a ~45% bear market. Now let’s take a look at the 4-hour chart below, which will give us more details into waves IV and V.
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Corrections consist of three waves. In the case of the Nasdaq 100, wave IV was a simple (a)-(b)-(c) zigzag, where both (a) and (c) are five-wave impulses, marked 1-2-3-4-5. The five sub-waves of waves 1 and 3 of (a) are also visible. The recovery from the bottom of wave (c) of IV at 10 441 in October, 2022, doesn’t seem like a complete impulse pattern yet. We expect it to evolve into one, though.
It looks like the index has now entered a sequence of fourth and fifth waves within wave V. The weakness we saw over the past two months must be wave 4 of (3). Waves 5 of (3) and (5) can be expected to lift the price to new records, interrupted by a dip in wave (4) in between. Instead of joining the bulls to celebrate the new all-time highs, however, we think investors should take advantage of the situation to take profits.
Sure, the Nasdaq 100 consists of some of the best companies the world has ever seen. But 2022 demonstrated that they, too, can be vulnerable and see their stock prices drop. Especially in a recession, which we think is very likely in 2024.
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