Are We in a Market Bubble?
In my experience as a technical analyst, the answer is yes. The next question is: if we are in a bubble, at what stage are we? That is somewhat harder to answer. The answer lies in the technical characteristics of a bubble, so let me break them down.
The angle of momentum becomes parabolic
The most visually obvious criterion is that price begins to accelerate sharply to the upside, approaching vertical on the chart. We saw this exact behaviour recently in gold. Price went vertical, ultimately collapsed from exhaustion, and gold is now in a consolidation pattern whilst it determines its next move.
Sustaining a vertical move requires enormous amounts of capital. Historically, such moves almost always produce large corrections when they finally resolve.
Candles become increasingly large
Towards the end of a bubble, individual price candles tend to grow significantly in size. In the Nasdaq’s case, candles are enlarging, but they have not yet reached the scale typically seen at peak exhaustion. I am not convinced we have seen the last of the truly large candles.
Price becomes increasingly distant from its moving averages
Whichever moving averages you prefer, the gap between them and the current price becomes extraordinarily wide compared to previous cycles. This extension alone is a meaningful warning signal.
Retracements become increasingly shallow
Pullbacks and corrections are a normal part of market behaviour — they allow a market to breathe and sustain its advance. In a bubble, corrections become progressively shallower. The market is unable to rest properly; it continues pushing higher without consolidating. This indicates that the appetite to continue has not subsided and is, in fact, intensifying.
On the RSI
Overbought readings from the Relative Strength Index are often cited at this point, but they are an unreliable guide in bubble conditions. A far more useful signal is divergence in momentum indicators. The fundamental flaw with RSI overbought levels is that price, particularly in bubbles, can remain in overbought territory far longer than seems rational. In a true bubble environment, the RSI becomes largely redundant as a signal.
The broader picture
There is also a longer list of characteristics — fundamental, technical, and behavioural — that tend to accompany bubbles. Among them:
- A strong narrative of a new era (in this case, AI)
- Belief that traditional valuation measures matter less
- Momentum-driven buying
- Concentration of capital into a narrow group of assets
- Retail participation in speculative themes
- Intense media coverage and fascination
- FOMO — fear of missing out
- Low perceived risk in certain market segments
- Excessive optimism among parts of the analyst community
- Dismissal of sceptics
- A growing gap between prices and near-term fundamentals in selected assets
- Late-cycle characteristics in some sectors
- Belief that central banks will intervene in any significant downturn
None of this means that the opportunities are not real. I have no doubt that AI will reshape daily life significantly, and we are probably still in the early stages of understanding its full impact on society.
The danger, however, lies in the overvaluation of individual stocks. There is arguably some safety in a diversified vehicle such as an ETF or index. Predicting which individual companies will emerge from this bubble unscathed is, frankly, very difficult — if not impossible.
Where are we in the cycle?
Returning to the question of timing, it is fairly safe to say we are most likely in the first half of this bubble. It would be irresponsible to be more precise than that — to claim, for example, that we are in the first quarter. What I will say is that the end of the bubble becomes easier to identify the closer we get to it.
For now, the most prudent approach for technical traders is to monitor the monthly chart closely and pay attention to each monthly candle as it closes. At the end of the bubble, the signal will be clear — either a candle that is completely exhausted, characterised by a large upper wick, or a large, decisive red candle.
One further note worth considering: historical market cycle analysis suggests that September tends to be a seasonally weak month for equities. If September passes without a meaningful negative impact, there is a reasonable case that markets could continue higher into year-end before dropping aggressively from January 2027. That date is worth keeping in mind as a potential inflection point — though, as always, the chart will have the final word.
Here be dragons. Technical traders and investors should proceed with caution, and maintain both common sense and a healthy dose of scepticism.