Nasdaq Breakout on Horizon as Financial Conditions Ease

Nasdaq has rebounded into a resistance zone as US financial conditions have eased in recent days, according to FOREX.com. Treasury yields have pulled back across the curve, the US dollar has weakened, and VXN, the Nasdaq equivalent of the S&P 500 volatility index, or VIX, has reversed from levels seen earlier in the week.

The correlation matrix shows a strong inverse relationship between these financial conditions and the Nasdaq. As yields, DXY, and VXN have fallen, Nasdaq has often done the opposite.

However, backtesting suggests that it's not just the initial shift but also the persistence of easing financial conditions that matters more. When all four indicators - DXY, VXN, US 2-year and 10-year yields - were lower across five- and 10-session windows, Nasdaq averaged gains of around 3.1% over the following 20 sessions, 6.2% over 60 sessions, and 9.5% over 120 sessions.

The index is now jammed against a confluence of resistance comprising the downtrend from the highs set in mid-August and the 23.6% Fibonacci retracement of the July to August bull move. A sustained break above this resistance zone could allow for long setups targeting a potential retest of the highs hit in August.