The Level the Nasdaq Needs to Hold

Fuelled by investors’ desire to profit from AI, the Invesco QQQ Trust Series 1 (QQQ) has been bid up strongly this year.

Its peak last month put QQQ within around 5% of its late-2021 all-time high.

However, Apple’s (AAPL) disappointing earnings last week show the increasing pressure this expensive sector is under. It is testing the conviction of longer-term bulls.

And QQQ’s price action after its July rebalance showed that buying momentum was already starting to fade.

Today, I want to see if momentum will continue falling – and what to look for from here…

Strong Buying Momentum

On the left-hand side of the chart below, QQQ’s long downtrend bottomed out in October last year.

QQQ tested and held support (red line) multiple times. That enabled it to form a base to rally.

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

QQQ’s rally in January coincided with the Relative Strength Indicator (RSI) surging through resistance (green line) and into the upper half of its range.

That strong buying momentum saw QQQ rally 20% in less than a month.

It also put the RSI in overbought territory (upper grey dashed line). After forming an inverse ‘V’ and retracing lower, the RSI tested and ultimately held support.

Apart from brief dips lower (left and middle red circles), the RSI remained in its upper range. That gave strong momentum to QQQ’s rally.

And the 10-day moving average (MA, red line) crossed above the longer-term 50-day (blue line) in late January. They have both steadily tracked higher.

But those two MAs have recently started to move closer together. That’s a warning sign that the trend could be losing momentum.

The other bearish signal you’ll notice is the action of the RSI. After reversing from overbought territory on July 19, it made a lower high later last month (orange line).

Take another look:

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

This falling momentum coincided with QQQ peaking at ‘A’ and then turning lower.

As the chart shows, QQQ’s brief rally after the Nasdaq rebalance petered out.

The RSI made its lower high on July 31. With it again testing support, what am I looking for around here?

Regaining Momentum

When the RSI previously dipped below support, it soon regained momentum and returned to the upper half of its range.

The corresponding pullback in QQQ bottomed out and set off the next leg of its rally.

For QQQ to resume its rally from here, we’ll need to see that RSI pattern repeat (right red circle).

But any rally hinges on the RSI holding support…

Any clear break below support will see QQQ’s emerging down move develop into something larger.

That’s why I’ll also be watching the two MAs. The 10-day MA breaking below the 50-day MA would add further weight to any down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. In One Ticker Trader, we choose a theme each month, which has included QQQ several times. We’ve had 10 winning trades out of 12 total using QQQ so far, with wins like 7.9%, 19.8%, 39.1%, and 56.6%.

And this month, we’ll be trading QQQ once more. If you’d like to join us, you can do so by going right here.

Mailbag

We love hearing from readers… As always, you can reach us at [email protected].

I fully agree that it’s better to make fewer tactful trades than to increase downside risks. The increased level of profits on my trades has allowed me to go beyond the initial one contract per trade. Thank you.

– John M.

I enjoyed the light-hearted intelligent back and forth, light, and friendly banter, back and forth insight into the peeled experiences of a well-seasoned market professional with true decades of experience to share. Also, making known the new possibilities in uncharted waters, as they present themselves available. I would love to hear more as opportunities arise. Thank you.

– William H.

Hi Larry, I’ve been a subscriber to S&P Trader for a while, and I will be for life! Thank you for teaching us what this is all about.

– Mike S.