Many traditional QQQ trendlines and support levels have been rendered useless
Subscribers to Chart of the Week received this commentary on Sunday, March 20.
The swift and sudden demise of the tech sector rendered many traditional trendlines and support levels useless. The Invesco QQQ Trust Series 1 (QQQ) is an exchange-traded fund (ETF) that tracks the Nasdaq-100 Index (NDX). Amidst the rotation out of tech, the QQQ's 80-day moving average that we identified as an area of interest back in early January, lasted until Jan. 13 and hasn't been sniffed since. Fast forward two ugly months and one interest rate hike later, tech sector trendlines should be revisited with a wider lens.
Since the calendar flipped to 2022, all of QQQ's 'common' moving averages like the 40-, 100-, or 160-day,ave been sunk. Even the uncommon 250-day and 380-day trendlines, which equate to a year and a year-and-a-half's worth of trading days respectively, have been breached. What trendline will step up next and try to corral the tech selloff?
QQQ is down 13% in 2022. At last week's lows, the -20% year-to-date level was tested. Not only did this level hold, but it happens to coincide with QQQ's 500-day moving average. This trendline hasn't been breached on a closing basis since early April 2020, the height of the Covid-19 breakout. And per the chart below, this moving average also held on Monday.
QQQ's current drawdown is already worse than the one wrought from the 2020 shutdown. Two years ago, that -20% level stepped up as support, as you can see below. In fact, the Covid low looks astonishingly similar to the technical setup right now. We all know what happened from there in 2020; an inverse 'Ides of March,' robust QQQ bull market that brushed off coronavirus variants for two years until investors finally hit the eject button.
QQQ's current drawdown is already worse than the one wrought from the 2020 shutdown. Two years ago, that -20% level stepped up as support, as you can see below. In fact, the Covid low looks astonishingly similar to the technical setup right now. We all know what happened from there in 2020; an inverse 'Ides of March,' robust QQQ bull market that brushed off coronavirus variants for two years until investors finally hit the eject button.
Usually there is early year strength in tech, and then we sell off into the "Ides." This year and in 2020 the selloff comes before the "Ides," and that should be investors on notice. Has the tech sector endured enough pain in the last three months that the bottom is now in? Can -20% and the 500-day form enough of a psychological barrier that compels investors to go bargain hunting on beaten-down tech? There is too much uncertainty at home and abroad to make anything more than a conjecture at this point.
One thing is for sure; pessimism surrounding QQQ is rampant. Put traders have taken control of QQQ in the options pits, per its 50-day put/call volume ratio of 1.46 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Short interest, meanwhile, has fallen 4.2% in the most recent reporting period. However, the 74.61 million shares sold short still accounts for nearly 14% of QQQ's total available float. It would be reckless to expect a frenetic, 2020-esque bounce off the -20% level, even if the 500-day trendline is layered in as additional support. But long-term trendlines – used in accordance with the sentiment data above -- can help an investor see the forest from the trees, especially when everything appears to be crumbling.
Outperformance isn't necessarily a guarantee for the QQQ. But long-term trendlines can help articulate the weeks, and even months ahead. To borrow a phrase from Schaeffer’s Senior Market Strategist Chris Prybal, going to be a 'tough, twitchy' year amid geopolitical unrest, a central bank combating inflation, and looming mid-term elections. Tests of resistance and/or support at these levels could present short-term buying or selling opportunities -- and potentially, opportunities that go overlooked by those not tracking these off-the-beaten-path indicators.