Tag: breadth

What’s the Downside Risk for QQQ?

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KEY

TAKEAWAYS

  • A bearish momentum divergence and declining Bullish Percent Index suggests rough waters ahead for the QQQ.
  • The 50-day moving average and Chandelier Exit system can serve as trailing stops to lock in gains from the recent uptrend.
  • If stops are broken, we can use Fibonacci Retracements to identify potential downside targets for the Nasdaq 100.

The Nasdaq 100 ETF (QQQ) is beginning to show further signs of deterioration, from bearish momentum divergences between price and RSI to weakening breadth using the Bullish Percent Index. How can we determine whether a pullback could turn into something more disastrous for stocks? Let’s look at how the 50-day moving average, Chandelier exits, and Fibonacci retracements can help anticipate downside risk for the QQQ.

To kick things off, we need to acknowledge how the QQQ has a place of distinction on the growing list of charts showing bearish momentum divergences.

This classic sign of a bull market top is when price continues to trend higher while the RSI (or some other momentum indicator) begins to slope downwards. Think of this pattern as a train running out of steam as it reaches the top of a hill. This weakened momentum usually occurs at the end of a bullish phase, when buyers are exhausted and there just isn’t enough momentum left to push the markets much higher.

But it’s not just about weakening momentum. Breadth conditions, which remain fairly constructive for the broader equity space, have really deteriorated in the past ten weeks.

Here, we’re showing the Bullish Percent Index for the Nasdaq 100. This is a market breadth indicator based on point & figure charts, and basically measures how many stocks in a specific index are currently showing a bullish point & figure signal.

Note how, in late December, this indicator was around 90%, meaning nine out of every ten Nasdaq 100 members were in a bullish point & figure phase. This week, we saw the indicator finished just below 50%. This shows that about 40% of the Nasdaq 100 members generated a sell signal on their point & figure charts in 2024.

What’s very interesting about that particular development is that point & figure charts usually have to show quite a bit of price weakness to generate a sell signal. So names like TSLA, AAPL, and others are breaking down, which suggests that further upside for the QQQ would be limited until this breadth indicator improves.

Are you prepared for further downside for the QQQ and leading growth names? The first item in my Market Top Checklist has already been triggered. Join me for my upcoming FREE webcast on Tuesday, March 19th, where I’ll share the other six items on the checklist and reflect on what signals we’ll be watching for in the coming weeks. Sign up HERE for this free event!

So what if the Nasdaq 100 does continue lower? At what point can we confirm that a corrective phase has truly begun? I like to keep things simple, so, in terms of an initial trigger for a tactical pullback, I always start with the 50-day moving average.

The 50-day moving average currently sits about $6 below Friday’s close, and also lines up pretty well with the February swing low around $425. So as long this level would hold, the short-term trend actually remains in good shape. A break below that 50-day moving average would tell me there is a much higher likelihood of further price deterioration.

But the 50-day moving average, while a simple and straightforward situation, is perhaps not the most effective way to gauge a new downtrend phase. Alexander Elder popularized the Chandelier Exit system in his books, and it represents a more nuanced version of a trailing stop because it is based on Average True Range (ATR).

Look back at the price peak in July 2023, and notice how the price remained above the Chandelier Exit through that price high. Soon after, the price violated the trailing stop to the downside, suggesting the uptrend phase was over and a corrective move had begun. Since the October 2023 low, the QQQ has consistently remained above the Chandelier Exit on pullbacks, as the price achieved higher highs and higher lows into March. After Friday’s drop, the Nasdaq 100 remains just above this effective trailing stop indicator.

So what if the Chandelier Exit is violated next week, and the QQQ begins to drop to a new swing low? What’s next for the Nasdaq 100?

Fibonacci Retracements can be so helpful in identifying assessing downside risk, because they measure how far the price may pull back in relationship to the most recent uptrend. Using the October 2023 low and the March 2024 high, that would give an initial downside target around $408. Further support could be at the 50% level ($395) and the 61.8% level ($382).

Note how well these levels line up with previous swing lows, especially the 61.8% retracement level. That last support level lines up with the swing low in December 2023, as well as the price peak in July 2023. I refer to that sort of level as a “pivot point” because it has served as both support and resistance, and these are often important levels to monitor.

A number of the mega-cap growth stocks, such as TSLA and AAPL, have broken down in recent weeks. But the latest patterns of bearish momentum divergences and declining breadth conditions tell us that there may be further downside in store for the Nasdaq 100. By keeping a watchful eye on trailing stops and potential support levels, we can perhaps navigate choppy market waters using the power of technical analysis.

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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The Top Five Charts of 2023

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KEY

TAKEAWAYS

  • 2023 was dominated by mega cap growth stocks, but the fourth quarter saw a potential change as other sectors experienced renewed vigor.
  • Three breadth indicators provided great clarity to the up and down cycles over the course of the year, as extreme readings tended to coincide with major turning points.
  • Interest rates remain top of mind as a pullback in the Ten Year Treasury Yield certainly seemed to provide support to the recent rally for stocks.

The end of the year provides a natural opportunity to look back and reflect on what we learned over the last 12 months as investors. I very much enjoyed thinking about how to tell the story of this market in just five charts, and to be completely honest, the videos below include way more than that!

But as much we love to make things more complicated for ourselves, mindful investors know that simple is often the best approach. So, by boiling down this year into five major themes and using these charts as a starting point to a deeper analysis of each, I found it to be a rewarding and at times eye-opening experience.

You can access the full playlist of the Top Five Charts on our YouTube channel, and you are welcome to ChartList I used during the videos, which you can find right HERE!

Without further ado, here are the five charts I selected, along with descriptions and video links. I hope you can use these as inspiration for your own year-end process and performance review!

Chart #1: S&P 500

As Ralph Acampora told me years ago, “Always start with a simple chart of the S&P 500.” And it’s been a fascinating year to do so, with each quarter providing a unique experience for investors, including plenty of ups and downs.

Looking back, I’m struck by what a sideways market we experienced really through the end of May. The S&P started with a strong January, but subsequent months basically brought retests of previous highs and previous lows, and no real indication of bullishness or bearishness on the larger timeframe.

June’s breakout provided a perfect example of the bearish momentum divergence, as negative momentum into the July high indicated an exhaustion of buyers. I also find myself focusing in on the October low, which caused me to be quite bearish at the time. That was definitely one of my key lessons learned in 2023, especially the importance of recognizing a clear change of character in November.

Chart #2: Ten Year Treasury Yield

Back in January 2023, I was asked during an interview to identify the most important chart to watch in 2023. I answered this chart, the Ten Year Treasury Yield ($TNX), along with the value vs. growth ratio. My thesis was that many investors had not experienced a rising rate environment (including me!), so this could mean some painful lessons as value outperformed growth as interest rates pushed higher.

As the chart clearly shows, the Ten Year Yield going from around 4% to 5%, completing a long journey from almost zero rates not long ago, did not provide the tailwind for value stocks that I expected. What a beautiful testament to the benefits of including macroeconomic analysis as part of a holistic investment approach, but also the importance of focusing on the evidence of price itself. If the charts say growth is outperforming, I’m going to want to stick with growth until proven otherwise.

Chart #3: Market Breadth

Breadth analysis is an essential component to my analytical process, as it addresses the issues related to our growth-oriented benchmarks being dominated by a small number of mega-cap stocks.

This chart includes three different breadth indicators: the S&P 500 Bullish Percent Index, the Percent of Stocks Above the 50-day Moving Average, and the McClellan Oscillator. With the first two indicators at 80% and 90%, respectively, this suggests a potential exhaustion point to the current upswing, similar to what we observed in July 2023, November 2022, and August 2022.

Chart #4: Leadership Themes

I have been thinking of 2023 as the year of mega-cap growth, but this fourth chart that it actually wasn’t about growth over value, but rather large over small. Reviewing the nine Morningstar style boxes, it’s clear that, while growth did indeed outperform value, it was overall more of large vs. small story.

Large-cap growth has outperformed large-cap value by almost 900 basis points (nine percent), but has outperformed mid-cap and small-cap style boxes by around 1300 basis points. Our benchmarks have been powering higher, propelled by the strength of large-cap growth, and one of the most important questions for 2024 will be whether this stretch of domination will continue.

Chart #5: Bitcoin

Higher highs and higher lows make an uptrend. And while Bitcoin ($BTCUSD) did not show that general pattern in the middle of 2023, it started the year strong and certainly ended the year in a position of strength.

Bitcoin has nearly tripled in value since December 2022, starting with a significant rally into an April high. But from March through October, Bitcoin basically was rangebound between 25,000 and 31,000. I remember laying out a game plan, which involved following the price momentum fueling any exit from that range. Sure enough, in October, we witnessed an upside breakout inspired by renewed optimism for a potential announcement confirming new spot Bitcoin ETFs. While that news has not yet arrived, the bullish uptrend shows that investors remain eager for this huge potential catalyst.

During my years in the Fidelity Chart Room, I was often reminded that charts can tell the best stories about market history. And as each new year concludes, the charts can provide a fantastic report card for your performance, a history textbook filled with practical lessons for years to come, and a reminder of the value of technical analysis in helping us identify opportunities and manage risk.

I hope these discussions inspire you to have a thorough review session as we wrap 2023, and an honest assessment of how you can improve your investing toolkit in 2024.

Happy holidays, thank you for making StockCharts a part of your process, and I’ll look forward to more great charts and conversations in the new year!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

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Bullish Tidings: Breadth Rallies, Oil Service Makes its Move, Bonds Survive Yield Scare

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Three weeks before the Fed’s next meeting, investors who have missed the AI/tech rally have thrown caution to the wind.

That urgency to catch up has led to an encouraging improvement in the market’s breadth and a marginal new high in the S&P 500 index ($SPX). The combination is likely setting the market up for what could be an impressive upward thrust. See below for full details.

And if June is any sign of what July may be, the bulls will rule the roost. Here are some grounding facts:

  • The S&P 500 index has returned an average of 3.3% in July from 2012–2022.
  • SPX rallied 9% in July 2022.

Of course, there are no guarantees that history will repeat itself. But it pays to be always ready. So, which sectors are likely to benefit? I have some thoughts just below.

Bond Yields Survive Yield Scare

I wouldn’t be surprised if the Fed joined the other global central banks that have raised interest rates in the last few weeks. However, from a trading standpoint, the action in bonds is more important, as bond yields have largely disagreed with the Fed’s perception of the economy since late 2022.

What I mean, of course, is that even as the Fed raised interest rates after October 2022, bond yields have fallen since then, setting up a divergence.

Certainly, there has been some volatility in yields. For example, the 10-Year US Treasury Yield Index ($TNX) bounced higher on June 29, 2023, as a surprising upward revision of US GDP to the 2% growth rate raised the odds of a rate hike at the upcoming FMOC meeting in mid-July. Yet, the flattening out of the Fed’s favorite indicator, the PCE inflation gauge on June 20, 2023, calmed things down.

That leaves the resistance band between 3.6–3.85% as the area to monitor. If TNX rises above 3.85%, we may see a move toward 4%, which would be very negative for stocks, especially the interest rate-sensitive homebuilders and real estate investment trusts (REITs).

The Fine Print in Housing Stats: Supply, Supply, Supply

As would be expected, as TNX flirted with 3.85%, there was a pullback in the homebuilder stocks. But as we’ve learned over the recent past, the correlation between the direction of bond yields and the action in the homebuilder stocks is nearly 100%. As a result, when bond yields, as I described above, hit resistance at 3.85% and turned lower, the homebuilder stocks regained their upward trend.  

Overall, the housing sector continues to deliver mixed news. For example:

  • New home sales recently rose—bullish for homebuilders.
  • Existing home sales are flattening out—neutral for brokers.
  • Pending home sales fell—not what you may be thinking.

The quiet part is all three stats above have two things in common—low supply and steady-to-rising demand. So new home sales are rising because builders are building enough of them to sell to enough people who are looking for housing. Existing home sales are flat because no one wants to sell a house with a 3% mortgage and buy a new one with a 6% mortgage. And, of course, if no one wants to sell their house, then you get a fall in pending home sales.

The bottom line remains unchanged. Low supply of steady demand favors the homebuilders.

Overall pending home sales fell 2.7% month to month. And if you’re wondering how each U.S. region fared in the pending home sales data here you go:

  • The Northeast delivered a 12.9% increase.
  • The South registered a 4.4% decrease.
  • The Midwest dropped by 5.3%.
  • The West’s sales dropped by 6.1% (a 62% decrease since 2001).

Moreover, the National Association of Realtors noted that there are still three pending offers per sale.

Mortgage rates ticked up last week, along with bond yields. Homebuilder stocks pulled back slightly before recovering. Several homebuilders will be reporting earnings in July, near the date of the Fed’s next meeting.

For an in-depth look at the news and trends in the housing and real estate market, check out my new publication, Joe Duarte’s Real Estate Weekly, here.  You’ll find crucial and detailed real estate market updates in an easy-to-follow and highly accessible format. This crucial information complements the stock picks at Joe Duarte in the Money Options.com. For more details on how to trade the bullish housing megatrend, check out my latest video here.

Oil Service Makes its Move

The bullish action in stocks on June 30 might be at least partially related to window dressing. That’s where portfolio managers who missed the rally play catch up to show their clients that they own stocks in groups that are rising. That means that the bullish action may or may not remain in some of the more extended market sectors, such as AI.

On the other hand, some portfolio managers use the cover of window dressing as a stealthy way to put money to work in sectors that offer value. As a result, while everyone is looking at the hot sectors, such as AI, it pays to look at sectors that have underperformed in the first half.

One of them is oil service. As the price chart illustrates, the Philadelphia Oil Service Index (OSX) shows some bullish characteristics. Note the broaching of the 200-day moving average after the recent double bottom it carved out over the last three months.

Moreover, its accompanying ETF, the Van Eck Vectors Oil Service ETF (OIH), looks even better. You can see that OIH has crossed above its 200-day moving average, marking what looks to be the start of a bullish reversal.

In addition, you can see that the Accumulation Distribution Line has begun to move higher as the On Balance Volume (OBV) indicator has bottomed out. Together, these two indicators confirm the emerging price trend in OIH as money moves in.

I have several oil service stocks in my Joe Duarte in the Money Options portfolios which are worth considering. One of them just broke out to a new high. You can check it out with a FREE trial to my service here.

NYAD Recovers and Gathers Upside Momentum

In a bullish development, the New York Stock Exchange Advance Decline line ($NYAD) turned on a dime last week and moved decidedly higher, breaking above short-term resistance. This comes after a short-lived dip below the 50-day moving average.

The Nasdaq 100 Index ($NDX) also turned around, finding support at its 20-day moving average. ADI and OBV have turned short-term negative.

The S&P 500 made a new high since the October bottom in stocks. As with NDX, SPX found support at its 20-day moving average. This is a bullish development. Both ADI and OBV stabilized.

VIX Is Likely to Bounce

After its recent new lows, the Cboe Volatility Index ($VIX) is poised to rise, as July often marks a bottom. On the other hand, VIX is at such a low level that it could take a while before the negative effects of a rising VIX affect the bullish action in stocks.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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