Just as investors and traders were conditioned blindly buy every single dip and breakout, the strategy stopped working. This has led many to either over-trade this market or let some winning positions slide into deep red, where they capitulated and sold.
While I continue to think that we are currently playing in the late innings of a cyclical bull market that rose out of the early 2009 abyss, that doesn’t mean we can’t get another leg higher in a broader topping process. In fact, if and when we slip into a cyclical bear market at some point over the coming six to nine months, it is imperative to keep in mind that some of the sharpest rallies occur in bear markets, particularly in the most oversold sectors and industries.
This also is what we have witnessed over the past three trading days or so, where technology and small caps — i.e., the Nasdaq-100 (QQQ) and the Russell 2000 (IWM) — have bounced back strongly off their oversold readings.
Many financial pundits and analysts in April cried doom and gloom in those very parts of the market, just as the bears ran out of steam. Turning risk-averse in both tech and small caps surely was a prudent thing to do, but going all-out, buck-naked short at the lows in those sectors (at least from a near-term perspective) isn’t a high-probability strategy.
In this toppy and choppy market, the topping process is not one where shorting the lows or buying the highs works well. One must operate more tactically. Although, this doesn’t mean you can’t trade a breakout or breakdown on a single stock basis if the setup is good.
QQQ Stock Charts
Looking at the multiyear chart of the QQQ ETF, note that it very much still operates within the uptrending channel (black parallels). In fact, the “correction” that the QQQ underwent this spring only took it to roughly the middle part of the range before turning higher again in recent days.
The Nasdaq-100 is thus consolidating its 2013 rally in the upper end of the longer-term range, and this could lead to one last hurrah, and an overshooting of the broader channel.
On Tuesday, technology was the second-best sector in the S&P 500, up close to 0.9% on the day, while the QQQ was second only to the Russell 2000 in performance for the major indices.
On the daily chart, note the double bottom (blue bubbles) in early February and again in the first half of April. More importantly, throughout April and May, the bulls sprinkled a plethora of bullish candles on the daily chart, indicating that the bears had run out of steam and the bulls started to nibble.
All of this was finally confirmed last week when the QQQ broke past its 50- and 100-day moving averages (yellow and blue lines, respectively) as well as past the March diagonal resistance line. The relative strength of recent days has since pushed the QQQ just about back to its early March highs.
In the immediate term the QQQ now looks stretched and ready for a pause. However, given the still-positive construct of the QQQ’s bigger picture, as well as the bullish candles and high-momentum breakout on the daily chart, active investors might want to consider buying dips in the QQQ with a multiweek upside target near $94 in mind.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.