Tech Stocks Could Face Challenges Over the Next Month

Tech ETF QQQ broke out above $182 to end last week, but now faces major call strikes overhead

Aug 28, 2018 at 3:33 PM
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Tech sector outperformance has become a mainstay of this market, led by the seemingly unstoppable FAANG cohort. Currently, the year-to-date gain racked up by the tech-focused Invesco QQQ Trust (QQQ), in excess of 17%, more than doubles that of the broad-based SPDR S&P 500 ETF Trust (SPY), at 7.7%. QQQ has been aided in its most recent leg higher by its rising 50-day moving average, which provided textbook support for late-June and late-July pullbacks, and hasn't been breached on a daily closing basis since May 3.

Even more impressive, QQQ has now established a convincing foothold atop the round $180 level, which is quite the formidable price point. In addition to the usual psychological significance associated with round-number levels, QQQ $180 also happens to be the site of a 15% year-to-date gain, a 20% advance from the Feb. 9 intraday low, and the site of more than 90,000 call options set to expire within the next month.

However, after barreling past $180, QQQ found itself stifled by $182 for a solid month. Since the initial encounter on July 24, this price point was touched no fewer than eight times on an intraday basis in the intervening weeks, with the exchange-traded fund (ETF) turning only three of these tests into daily closes above this level.

Notably, QQQ set its all-time closing high of $182.82 on July 25 -- which gives $182 some instant significance as a potential level of resistance to clear going forward. And from an options perspective, the 182 strike carries open interest of more than 60,000 contracts set to expire over the next month.

But perhaps the most crucial detail here is that calls substantially outnumber puts at the 182 strike -- unlike the 180 strike, where puts dominate. And that call skew only grows more exaggerated at higher QQQ strike prices, culminating in the outsized accumulation of 110,000-plus calls at short-term QQQ 185 strikes.

While Friday's close above $182 is an encouraging show of strength, the gauntlet of call-heavy strikes overhead is a daunting prospect for tech bulls. As front-month options expiration draws closer, don't be surprised to see powerhouse tech stocks tripped up by these overhead call option clusters, and prepare for some potentially choppy price action accordingly.

qqq open interest by strike sept 2018

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 26.


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