A Technical Reflection on the QQQ

Published June 16, 2017

This week, for the first time this year, the Nasdaq 100 (symbol: QQQ) said “hello!” to its 50-day moving average. The 50-day moving average is a very common reference point for investors and machines programmed to trade. In Chart 1 below, the 50-day moving average is the blue upward sloping line. We can also see that over the past eighteen months, the 50-day moving average has NOT been necessarily a place of solid support for the index, spending much of 2016 moving back and forth above and below the line.

Chart 1: The Nasdaq 100 takes a breather after a furious march higher

On the bottom of the chart, we show that the 8-day moving average, a measure of short-term strength, has fallen slightly below the 20-day moving average, a little bit longer measure of strength. This slip confirms what we already know – that the Nasdaq has been weak on a short-term basis. This move of a shorter moving average below a longer one serves merely as a milestone for the weakness. We note that this is the first time this has occurred since December.

We note the same thing on the relative strength chart just above where we’ve drawn a red line to highlight a typical stopping point in the downdrafts of the QQQ. We see that in April, the index’s pause in price reached the red line before resuming its upward move.

Finally, we note the pink platforms on the chart showing where the price of the QQQ has gotten support and gathered itself to lift off to another run higher. We would guess that somewhere around 135-136 would be that support platform right now.

Chart 2: A longer term view

In short, we technically expect that the Nasdaq 100’s recent weakness, a pause after a torrid move to record highs, should be near a point of ending and likely chopping sideways to digest the gains. If there is a surprise shock to the markets, we would refer back to the green bar in late 2015 (on the longer term Chart 2 just above). There, the index cleared 110 only to fail and gap down below the 50-day moving average and the green bar to kick off a notable decline. There’s nothing economically to suggest this scenario right now. We never see surprise shocks, by definition, of course. For now, we admire the strong run of our focus index and the handsome gains it has brought us.

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Market Update

Stocks came into the week rattled a bit by a sudden shift in favored market sectors with large-cap tech stocks selling off and a sharp downdraft in oil prices adding to the uncertainty. Monday added to that message with the Nasdaq sliding another -0.5% while the broader market only touched lower -0.1%. However, Tuesday brought a reversal of trend with tech stocks bouncing back to lead the broad market higher by +0.4%. Wednesday brought a further tumble in oil prices, with the commodity settling under $45/barrel. The Federal Reserve meeting was the day’s focus event as the central bank lifted rates another +0.25% as expected and outlined plans to reduce their balance sheet full of government and mortgage bonds, again as expected. After a volatile session as investors parsed the Fed announcement, stocks settled with only a -0.1% move. Thursday brought another slightly negative -0.2% session with investors looking for some positive news to change the tone and finding nothing. Friday opened with a blockbuster M&A announcement. Amazon’s purchase of organic grocer Whole Foods wreaked havoc among other food retailers, and retailers in general to an extent, sending Walmart, Target, Costco, Kroger, among others down 5-10%. The broad market managed to hold flat however with industrials continuing their recent relative strength and energy shares bouncing back. The Nasdaq 100 (QQQ) suffered a second week of downdraft losing -1.04% for the week while the S&P 500 had a second flat week at +0.17%. Small-caps, which had been finally showing some strength the prior three weeks, succumbed to the more generally negative tone to post a -1.00% weekly result. Warm wishes and until next week.