The Nasdaq-100 — as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — on Thursday closed marginally lower on the session while most other major U.S. equity indices lifted nicely. Some of the larger tech stocks such as Amazon.com, Inc. (NASDAQ:AMZN) weighed on the index right at a significant confluence area of resistance.
The severity of the recent rally in stocks caught many bears by surprise — particularly those that forget how steep and vicious bear market rallies can be. As such, let me reiterate that particularly in bear markets it pays to take the other side of extreme emotions; when selling and sentiment gets extreme, we layer into long positions while sharp swings the other way are better faded.
To wit, pessimism in February as measured by investor sentiment and futures positioning was extreme and has since swung nicely in the other direction. However and as we will see on the charts of the QQQ ETF below, we have yet to see any bearish reversal to confirm the more bullish sentiment of late.
Earlier this week, the S&P 500 filled its Jan. 4 down-gap. The Dow Jones Industrial Average has done the same, but both the Russell 2000 and the Nasdaq 100 have yet to fill those down-gaps.
Before looking at those gaps a little closer, let’s note where the QQQ currently sits in the bigger picture.
On the multiyear weekly chart we see that in 2013 the QQ began breaking above the upper line of a multiyear channel. The August 2015 correction and the selling pressure in January/February did mean-revert the index back into the channel. However, the entire price action since early 2015 continues to look toppish and could ultimately lead to at least a re-test of the August 2015 lows in the low to mid-$80s.
On the daily chart, we see that after the hefty 14% rally off the February lows, the QQQ etf has now arrived at a confluence resistance area made up of both its 100- and 200-day moving averages (blue and red lines respectively) as well as the 61.8% Fibonacci retracement from the December highs into the February lows.
Additionally, there is some diagonal resistance (i.e., former support to content with). This is a logical spot for the QQQ to pause and potential reverse lower. However, the longer the ETF does not give us a strong bearish reversal the better the odds are that the gravitation toward the Jan. 4 down-gap continues. The gap closes around $112 on the QQQ.
Tactical traders could remain long the QQQ as long as a strong bearish reversal does not rear its head. Keep the $112 price target in mind.
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