U.S. stocks on Wednesday put in one of the more significant bearish reversals in recent months. You can thank the Federal Reserve, as well as a few other geopolitical-centric headlines. While I believe the markets still are constructively positioned through a multimonth lens, some areas — including large-cap technology — are likely due for a pause.
One worry point: The Nasdaq-100 — as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — in recent weeks has arrived at a key technical resistance area. I believe the QQQ will struggle to find fresh upside momentum from here, at least until we get a better consolidation period.
Large-cap tech stocks such as Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN) have shown meaningful leadership and outperformance against the broader U.S. stock market in recent years and over the past few months. I still firmly believe in these names and see them continuing their upward trajectory.
But in the near-term, their upside is capped.
QQQ ETF Charts
To illustrate the great relative strength over the years by large-cap tech, look at the below chart. I have plotted a ratio chart whereby I divided the QQQ by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
The chart says it all: The uptrend clearly is intact. Structurally, there’s little reason to fight a trend like this, which is well-defined in relative and absolute terms. This calls for a “buy the dip, sell the rip” strategy.
On the multiyear weekly chart of the QQQ, we see that the Nasdaq-100 — due to its rally in recent weeks — once again arrived at the very upper end of a multiyear up-sloping trading channel.
From a momentum perspective, note that the MACD oscillator at the bottom of the chart has also reached very stretched readings.
To be crystal clear, none of this necessarily means that the QQQ has to fall apart from here, but it does point to low odds of a meaningful new rally in the near-term.
Lastly, on the daily chart, we see that the QQQ’s MACD momentum oscillator over the past few weeks has already shown what I refer to as “negative divergence.” That’s where price proceeded to marginal new highs while momentum capped out and made lower highs.
On Wednesday, April 5, the QQQ ETF and the broader market gave up all of their intraday gains by the closing bell. The long tail on the daily candle at the upper end of the aforementioned trading range is a near-term warning sign that buyers are simply exhausted.
Less risk-averse traders could short the QQQ or even buy puts or put spreads with an initial downside target around $129-$130 while using the $133.60 area as a stop loss.
More conservative traders may look to lighten up on any existing long positions in the QQQ or sell out-of-the-money call spreads to generate income.
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