Stocks on Thursday reacted to Wednesday’s latest dovish FOMC musings much as they have in recent years — namely, they ramped higher. The Nasdaq Composite as a result surpassed its previous all-time highs from May 19 and thus continues to trend higher.
However, the Nasdaq-100 — as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — clearly is pushing higher, but it still trades below its all-time highs from the year 2000, which traders can use as an upside target.
Each time when we discuss the Nasdaq-100, it cannot go unmentioned that Apple Inc. (NASDAQ:AAPL) — the world’s largest company by market capitalization — currently makes up more than 14% of the index. While the other 85% of the index certainly matters as well, the weight and general direction of AAPL stock tends to have a significant impact on the index.
To wit, while the QQQ ETF is up by about 7% year-to-ate, AAPL stock is higher by roughly 16%, thus doing its part in pulling up the index. From a risk management perspective traders are wise to closely watch AAPL stock for clues to movements in the QQQ.
QQQ ETF Charts
Looking at the long-term weekly chart of the QQQ ETF we see that the ascent since 2013 has become particularly steep and narrow-ranged while momentum as per the Relative Strength Index (RSI) at the bottom of the chart has diverged negatively by making a series of lower highs. While this is no immediate-term warning shot, the longer these conditions last, the more violent an ultimate corrective move will be.
Investors and traders would be wise to follow the weekly candles, and note that any bearish reversal would be a first warning sign.
With the above strong trend in mind, we then look at the daily chart of the QQQ ETF and note a chirpier tone.
Through a multimonth lens, the Q’s have been building a higher base since March, the upper end of which is now being tested as a result of Thursday’s 1.46% rally. The bullish reversals since March (green arrows) all took place at the rising 100-day simple moving average (blue line), which has been a better trade than trying to chase the index higher, and now makes this moving average that much more important as a reference line.
Thursday’s rally also pushed the QQQ ETF out of a bull flag formation that now looks to have better odds of resolving to higher highs.
Active traders and investors could look to buy the QQQ around current levels with an eye toward the $114-$115 area as a next upside target.
From a risk management perspective, traders need to keep in mind that today is quadruple-witching options expiration, and that any sharp bearish reversal of Thursday’s rally would put a wrench into the near-term bullish setup until Tuesday’s highs are overcome again.
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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.
