Watch Out: Big Tech Earnings Will Drive the Nasdaq this Week

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Yesterday we discussed a profitable short Invesco QQQ Trust Series 1 (QQQ) trade that we closed out last week.

It was just one of several profitable trades we’ve done on QQQ (an ETF that mirrors the Nasdaq-100). And since QQQ peaked back on July 19, it’s delivered gains ranging from 21%–74%.

What’s more, we’ve achieved these results by trading QQQ in both directions…

This week, however, QQQ will come under even more attention when heavy hitters like Amazon (AMZN), Microsoft (MSFT), and Meta (META) release their quarterly earnings.

Today, I want to see how this could play out for this highly watched index…

QQQ’s Changing Profile

On the chart below, the 50-day moving average (MA, blue line) shows QQQ’s long-term uptrend that kicked off at the start of this year…

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

As you can see, QQQ’s initial sharp move higher began when the relative strength index (RSI) rallied from near-oversold territory (lower gray dashed line) in early January…

That rally then continued with the RSI breaking into and tracking in the upper half of its range (above the green line).

QQQ’s uptrend was further confirmed when the shorter-term 10-day MA (red line) crossed and tracked above the 50-day MA.

By the time QQQ peaked in July at “A,” it had gained around 48% since its January lows.

However, after hitting its July 19 high, you can see that QQQ’s profile changed.

Take another look:

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

The 50-day MA rolled over with QQQ then making lower highs at “B” and “C.” These lower highs, along with lower lows, are a common bearish pattern.

As the chart shows, each of these retracements from the peaks at “A” to “C” coincided with the RSI reversing and tracking lower.

But today I want to focus on the action around the bottom half of the RSI…

When the RSI formed a “V” and rallied in mid-August (left orange circle), QQQ bounced. QQQ then rallied up to “B” after this higher reversal in momentum.

And there was a similar pattern in late September.

With the RSI forming a double “V” (right orange circle) and rallying this time, QQQ made another counter rally up to a lower high at “C.”

But after hitting that recent peak, the RSI retraced again, dragging QQQ lower.

So, with the RSI now tracking back in its lower band, what am I looking for?

Oversold Signals

We know that when the RSI gets stuck in its lower half, stocks will typically keep falling.

That’s simply because there isn’t enough momentum for a stock to hold a level, let alone turn it around and drive the stock price higher.

Remember, though, that with our mean reversion strategy, we’re looking for stocks that overshoot in either direction. We then aim to profit when those stocks snap back the other way.

And that’s what I’m looking for from here…

If disappointing earnings from these big tech behemoths push QQQ too far to the downside, we’ll likely see the RSI fall into oversold territory.

The RSI forming a “V” and rallying (per the two orange circles) could then provide a potential setup for a counter-rally trade against QQQ’s prevailing downtrend.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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Do you think QQQ will stay low? Share your thoughts at [email protected].