Oh what a difference a week makes. Last week, the Nasdaq Composite was on the precipice of a major breakdown, and now it’s soaring to yet another new high.
Strength in tech stocks has helped the Nasdaq be the first of the major U.S. indices to eclipse its prior highs established before the recent market swoon. The likes of Apple (AAPL), Amazon (AMZN) and Google (GOOGL) have all come back with a vengeance.
In light of today’s breakout, let’s take a fresh look at the PowerShares QQQ Trust (QQQ) — which tracks the Nasdaq-100 — and see what kind of opportunity awaits in the tech space.
The rebound has vaulted QQQ back above all its major moving averages in true bullish fashion. The technology sector has reclaimed its leadership role this week by also notching a breakout in its relative performance.
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The lower panel of the accompanying chart shows the Comparative Relative Strength study using the S&P 500 as a benchmark. When the line is rising, QQQ is outperforming the S&P 500; when the line is falling, QQQ is underperforming.
As shown by the upward tilt of the line, QQQ has been besting its fellow large-cap index for awhile now. Today’s breach of resistance simply reaffirms its dominance.
Perhaps the only item of worry with today’s breakout is how far the QQQ ETF has already traveled. The best breakouts are those that kick off a new upswing, not ones that transpire after a stock has rallied six days in a row. With QQQ having already climbed 5% it’s worth eying today’s breakout with a touch of skepticism.
And yet, we’ve seen more than a few melt-ups over the past few years of this bull market, so it’s not as if overbought markets can’t continue ascending.
Implied volatility has once again returned to the basement, so options on QQQ can be snatched up on the cheap here. If you’re willing to bet the bulls capitalize on today’s breakout, delivering further upside in the coming weeks, consider buying the Sep $111/$114 call spread for $1.60.
The max risk is limited to the initial debit of $1.60 and will be lost if the QQQ ETF sits below $111 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $1.40, and will be captured if QQQ can rise above $114.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
