Trade of the Day: Play the Cracks in the PowerShares QQQ ETF

Tech stocks have more room to fall, and this creates an opportunity in the QQQ ETF

It has been a volatile start to the traditionally volatile month of October in the markets and as things go when we flip into a “risk-off” phase, correlation among equities and indeed among many risk assets tends to spike. Thus, tech shares also came under pressure and the popular PowerShares QQQ ETF (NASDAQ:QQQ) in the first two trading days of October has fallen about 2.50%. Although it’s possibly oversold in the immediate term, the path of least resistance for the QQQ ETF looks to point lower toward a well-defined next downside target.

Trade of the Day: Play the Cracks in the PowerShares QQQ ETF
Source: Shutterstock

Before looking at the charts, let me say that while October typically tends to be littered with volatility spikes, this October is particularly ripe for volatility. In addition to the usual Q3 corporate earnings season, we also have the U.S.-China trade talks back on the table, political headlines and Brexit headlines to deal with.

All of that means that there is a ton of noise out there that could lead to sharp rallies and sharp drops in the market.

QQQ ETF Charts

QQQ ETF Charts, weekly
Source: Charts by TradingView

Taking a step back for perspective, we see that over the past 12-18 months, the QQQ ETF has been rising within the confines of a “rising wedge” pattern. With the selling in the first week of October 2019, the wedge is being violated, i.e., QQQ’s price is breaking down.

From a momentum perspective we see that the relative strength index (RSI) at the bottom of the chart after peaking in early 2018 continues to mark a series of lower highs. In other words, while the QQQ ETF was still holding up relatively well (at least coming into this week), it has certainly lost momentum.

QQQ ETF daily chart
Source: Charts by TradingView

On the daily chart, we see that year-to-date, the QQQ ETF, within this bigger picture rising wedge from the above chart, has experienced three similar smaller rising wedge patterns. The first two wedges ultimately saw corrective moves of 11% and 8%, respectively, and the first one thus far measures 6%.

Looking a little closer at this daily chart, we see that the early August lows and the red 200-day simple moving averages currently roughly coincide around the $179-$180 area. This is a logical and technically viable downside target for the QQQ and is about another 2% lower from the close of Oct. 2.

From a tactical perspective, this $179-$180 area would thus be a spot to take profits on this short-side trade idea.

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