Fibonacci extensions could provide clues to the QQQ bottom
For what feels like the first time in ages, the Nasdaq-100 (NDX) is fresh off a weekly win. Along those seven weeks that saw bottom after bottom fall out, we kept coming back to certain technical levels and moving averages. We're quick to pat ourselves on the back when a trade scores, so in the spirit of transparency, let's look at our recent Invesco QQQ Trust Series 1 (QQQ) coverage and ascertain where the tech ETF stands now that a bottom may have finally been reached.
As we mentioned in this space on April 24, QQQ's 500-day moving average – which coincided with the $325 level – had just been breached. With the help of Schaeffer's Senior Market Strategist Chris Prybal, we noted that there was peak put open interest in front-month May contracts at the round-number $300 level. We all know what happened; QQQ barreled below $300 on May 9 and proceeded to test and retest that level for the remainder of the month.
Last week, QQQ reclaimed $300, and was last seen at $308.42. What stood out between QQQ's May 20 annual low of $280.21 and now? Prybal identified a Fibonacci extension that stepped up as support. Per the five-year chart below, the QQQ, prior to its latter-week surge, was approaching a 161.8% Fibonacci extension from its Covid highs and lows. Similar to when we speak about a Fibonacci retracement, the extension projects the position a stock’s shares could move to next. These levels often are of interest to traders, as they can help establish potential areas of support or resistance and indicate a good price target.
The below chart is a zoomed in snapshot of the aforementioned timeframe. The 161.8% was tested but never was breached. This could be an important pivot point in the months ahead, especially after Friday, when the core personal consumption expenditures price index rose 4.9% in April, down from the 5.2% pace seen the previous month.
Could options traders be ahead of the curve? Despite puts outnumbering calls on an absolute basis, QQQ's 50-day call/put volume ratio of 0.85 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits one percentage point from an annual high, implying a healthier-than usual appetite for long calls of late.
Regardless of the long-term outlook, if you're at least bullish on the short-term, there are several tech names within QQQ that may be worth a flier. In Schaeffer's Senior Quantitative Analyst Rocky White's latest Indicator of the Week, he identifies the 25 best-performing S&P 500 Index (SPX) stocks in the last 10 years. Eight stocks on that list fall under QQQ's holdings.
Peak inflation may be in the rear-view mirror, but it will still be 'higher for longer.' You can certainly forgive investors for flinching a bit when dipping their toe back into certain tech names like QQQ. To those skittish investors, we want to remind them that purchasing options in lieu of buying stock outright allows one to put less dollars at risk relative to equities, so as to maximize your ability to leverage in the face of continued upside.
Subscribers to Chart of the Week received this commentary on Sunday, May 29.