Chart 'Phenomenon' Could Point to a Breather for Tech Stocks

Tech bulls should brace for a possible short-term pullback

Bernie Schaeffer
Jan 23, 2018 at 1:42 PM
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The technical picture for U.S. stocks has been rosy thus far in 2018, with the major market indexes assailing new heights at lightning speed. The Dow's ascent north of 26,000 has dominated headlines of late, and even small-cap stocks recently broke out to the upside after underperforming in 2017. But it's the tech sector -- represented by the PowerShares QQQ Trust (QQQ) -- outperformance that has piqued my interest, with a recent technical "phenomenon" hinting at a possible short-term breather ahead.

The QQQ recently ended 5% above its 50-day simple moving average. This technical "alarm bell" has been rung just 20 times since the March 2009 stock market bottom, going off exactly twice a year since 2010.

The last time the exchange-traded fund (ETF) was 5% above its 50-day was June 2, 2017 – exactly one week before a massive tech sell-off and series of "buying climaxes" for Nasdaq-100 Index (NDX) (upon which QQQ is based) components. One month after the June signal, QQQ was down 5.07%.

Naturally, one signal is far too small a sample size for which to base a prediction of possible short-term consolidation or even weakness for QQQ. But considering all signals since 1999, of which there are 41, the QQQ has, in fact, typically underperformed in the near term, according to data from our Quantitative Analysis department. A week after signals, the ETF was down 0.4%, on average, compared to an average anytime one-week gain of 0.19%. A month after signals, QQQ generated a return of just 0.3%, on average -- not even half its average anytime one-month return of 0.75%.

Still, we dare not call a top to the tech rally, per se; the intermediate-to-long-term data suggests merely a bout of stagnation on the horizon, which should ultimately resume to the upside. QQQ averaged a gain of 3.56% three months after 50-day signals, and was higher more than 75% of the time. That's compared to an average anytime gain of 2.28% since 1999, with a win rate of just over 66%. Echoing that, the ETF enjoyed stronger-than-usual six-month gains of 5.65%, on average, following signals, compared to 4.67% anytime.

And from a contrarian perspective, traders are not yet displaying the type of complacency or euphoria we'd associate with a top. QQQ's recent rally has been accompanied by increasing put open interest, which is in the 99th percentile of its annual range (source: Trade-Alert). Likewise, short interest on QQQ components is also near the top of its annual range, after growing almost 5% in 2017; tech stocks are prone to short covering as shorts' losses pile up.

In conclusion, there is evidence to suggest that a period of sluggish price action could be in the cards for QQQ, based on various relative strength indicators and the aforementioned "upstaging" of its 50-day moving average. From a longer-term standpoint, however, there's certainly no sign yet of an "official" breakdown in the record-setting rally – and there's plenty of cash still on the sidelines to fund more upside. That said, I'll leave you with some levels to watch on QQQ – both overhead and below – through the next few weeks:

  • $180.00 = 1.5x March 2000 high of $120
  • $170.00 = roughly double the August 2015 low
  • $168.00 = home to peak call open interest in the newly front-month February series
  • $159.00 = home to QQQ's 50-day moving average
  • $155.76 = year-to-date breakeven
  • $153.90 = home to QQQ's ascending 80-day moving average
  • $152.64 = 1.5x September 2015 monthly closing low

 

QQQ chart of the week 0119


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 21.

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