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Trade of the Day: A Warning Flag for the Nasdaq 100 QQQ ETF

The large-cap tech stocks represented by the popular PowerShares QQQ Trust (NASDAQ:QQQ) ETF have been relative out-performers versus the broader U.S. large-cap stocks. In this earnings recession, however, this group of stocks, and thus QQQ, is vulnerable to serious mean-reversion lower both in absolute and relative terms.


Source: Shutterstock

One of the main pillars of any sound trading and investing process in my eye must be looking at things in both absolute and relative terms. Throughout my career I have found that a key separator between successful market participants, and those that at best tread water, is this crucial perspective on how one asset trades versus another.

A major relative or ‘ratio chat’ I have been watching closely over the years has been that of the QQQ ETF versus the SPDR S&P 500 ETF (NYSEARCA:SPY). On the following long-term chart with weekly increments, we see that QQQ has consistently outperformed SPY since the year 2002 (i.e., once the dot-com bubble burst and bottomed out).

QQQ ETF Stock Charts Compared to SPY

Source: TradingView

We can apply traditional trend-following technical analysis to both absolute (single stock/ETFs) or relative, i.e., ratio charts.

From a trend-following perspective, we see that the ratio of QQQ to SPY followed a longer-term upward sloping channel. In January and first half of February, it led to a parabolic overshooting move.

This simple but effective analysis begs for more mean-reversion lower, i.e., relative underperformance of QQQ versus SPY for the coming weeks or months.

Source: TradingView

On the longer-term weekly chart of the QQQ itself, we see that it also overshot the long-term trends on the absolute chart in late 2019 and into early 2020.

While it has begun to mean-revert notably back into the longer-term up-trending cone (black lines), ultimately we could see further mean-reversion lower toward the low end of the trend toward the $150s.

Source: TradingView

On the daily chart we see that after slicing through all short-term support levels, QQQ in recent days found some footing at horizontal technical support in the high $160s. While it is entirely possible that in coming days the QQQ ETF rallies, possibly into the high $190s toward $200, technical resistance is likely to come in hard up there and relative underperformance will continue.

Trading QQQ

Active traders and investors could look to short or underweight the QQQ ETF through the lens of coming weeks to months with a downside target around the $150 area.

My favorite way to trade setups such as the one in QQQ is by using a conservative and simple options strategy. I am holding a special webinar on Friday, March 27 to explain this strategy. Sign up here for the free webinar.

Free options webinar: Serge’s simple and conservative options strategy for steady returns. Register here.

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