Limited Upside As Investors Await First Fed Cut: Here's My Most Likely Scenario For QQQ

While the S&P 500 finished the week once again testing new all-time highs around 5650, the Nasdaq 100 remains rangebound in a symmetrical triangle or “coil” pattern. While this pattern does not necessarily suggest a potential next move for the QQQ, it did lead me to think about four different scenarios that could play out over the next six to eight weeks.

The chart of the QQQ looks alot like the chart of Nvidia NVDA, with a clear consolidation pattern of lower highs and higher lows.  Other leading growth names like Meta Platforms META have failed to signal an upside breakout to give an “all clear” signal for the bulls.  And defensive sectors continue to thrive, even though the S&P 500 finished in the green every day this week.

Today, we’ll lay out four potential outcomes for the Nasdaq 100. As I share each of these four future paths, I’ll describe the market conditions that would likely be involved, and I’ll also share my estimated probability for each scenario.  

By the way, we conducted a similar exercise for the Nasdaq 100 back in June, and you won’t believe which scenario actually played 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 how 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, with the QQQ achieving a new all-time high over the next six to eight weeks.

Option 1: The Very Bullish Scenario

What if NVDA breaks out to the upside, and META finally pops above $550, and the rest of the Magnificent 7 stocks go right back to a leadership role?  That would certainly drive the Nasdaq and the S&P 500 to their own new highs in the next month or so.  Perhaps Powell’s press conference next week renews investor optimism and the market prices in a perfect soft landing for the economy.

Dave’s Vote: 10%

Option 2: The Mildly Bullish Scenario

If the Mag7 names continue to struggle and fail to breakout, but other sectors like financials and industrials surge higher, we could get a more mildly bullish rally here.  That would mean the QQQ remains below it’s 2024 high, but stockpickers rejoice as plenty of opportunities appear outside of the growth sectors.

Dave’s vote: 30%

Option 3: The Mildly Bearish Scenario

What if the Fed meeting does not go as well next week, and investors start thinking recession again?  Defensive sectors have certainly been showing strength in recent months, and it feels like it would not take much to reverse the signs of optimism I’ve observed over the last week.  Bonds outperform stocks as investors get defensive and we’re all hoping for an October rally to overcome the bearish sentiment.

Dave’s vote: 45%

Option 4: The Super Bearish Scenario

You always need a doomsday scenario, and this last option would involve a big time “risk off” move for stocks.  Growth stocks rotate lower, and risk-off plays like gold shine brightest as the QQQ retests the August low around $425.  Perhaps Powell fails to boost investors’ confidence and the “goldilocks scenario” for the economy seems like a distant memory.

Dave’s vote: 15%

What probabilities would you assign to each of these four scenarios?  Check out the video below, and then drop a comment with which scenario you select and why!

RR#6, Dave

PS- 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.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.