QQQ: Buyers Show The Way

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The Invesco QQQ ETF (NASDAQ:QQQ) has continued its outperformance against nan S&P 500 (SPX) (SPY) done its caller February highs, defying nan "bubble" calls by QQQ bears.

We highlighted successful our early December article arguing why outperformance could beryllium "around nan corner." We added successful our January update suggesting why QQQ's betterment wasn't complete yet.

With nan surge since QQQ's lows successful precocious December, a play of consolidation and profit-taking should beryllium expected. Accordingly, nan QQQ was up much than 20% from its precocious December bottommost done its February highs.

QQQ/SPY value floor plan (weekly)

QQQ/SPY value floor plan (weekly) (TradingView)

As seen above, nan QQQ/SPY re-tested a captious guidance level based connected its 50-week moving mean (blue line) aliases MA aft a accelerated surge. Hence, buyers joining nan caller buying frenzy must beryllium cautious astir bottom-fishers looking to trim exposure.

Does it make sense? Our study suggests that nan QQQ apt formed its semipermanent bottommost successful October 2022, further corroborated by nan robustness of its precocious December lows. Hence, nan bearish lawsuit seems to beryllium weakening, but it doesn't mean nan QQQ will retrieve successful a consecutive line.

Investors contemplating adding vulnerability now request to see respective factors that could effect nan bullish case, causing anemic buyers to bail retired and expecting further downside risks.

The Fed could beryllium prodded to tune up its hawkish tone, arsenic nan caller CPI and PPI people showed that nan Fed's ostentation conflict is acold from over. Commentators besides suggested that nan way toward its 2% value stableness extremity will beryllium highly challenging and filled pinch bumps. We besides noted commentaries arguing why nan Fed could beryllium compelled to assistance its ostentation target toward nan 3% to 4% range.

However, that seems unlikely, arsenic it could origin important harm to nan Fed's credibility complete nan agelong term. Hence, nan request to enactment accordant pinch its messaging could lead Fed policymakers to see a 50 bps hike if it intends to move faster toward its ostentation target.

Hence, nan captious mobility is whether nan marketplace has priced successful a much hawkish Fed?

Accordingly, liking complaint futures person already moved upward, reflecting a "57.5% probability of a highest [rate] of astatine slightest 5.25% to 5.50% successful June."

Therefore, to opportunity that investors person not taken statement and bespeak a much hawkish Fed is not appropriate.

Also, unit traders person not gone into FOMO mode. Instead, caller information suggests that unit traders are still pessimistic. Accordingly, "the jump successful activity tin beryllium owed to galore factors, astir of which person thing to do pinch speculation."

Notably, nan retail-only-buy-to-open aliases ROBO Put/Call ratio "is supra wherever it was astatine each azygous awesome highest successful nan S&P complete nan past 23 years." As such, calls suggesting that unit investors/traders person engaged successful highly speculative activity precocious don't align pinch data-driven insights.

Also, it's captious to statement that money managers had already shifted away from a highly pessimistic positioning astatine nan extremity of 2022 toward a much neutral stance. Therefore, money managers are apt not expecting October lows to beryllium surgery down further, moreover arsenic a patient consolidation shape could follow.

The tech assemblage is important, which accounts for nearly 50% of nan QQQ's weighting. Hence, tech's continued betterment will beryllium pivotal toward QQQ's retaking its uptrend bias subsequently.

Investors request to statement that tech's (XLK) outperformance against nan SPX successful nan early stages of a caller bull marketplace is not surprising. Accordingly, "technology typically outperforms successful nan early stages of a caller cyclical advance." Moreover, if investors person a precocious condemnation of nan QQQ's October lows, they should not beryllium concerned pinch an impending pullback, arsenic nan 10Y Treasury output is connected an uptrend continuation pattern. As such, near-term downside volatility should beryllium expected, offering investors connected nan sidelines different opportunity to pounce connected weakness.

Backtesting information suggests that nan NASDAQ (NDX) is backmost connected a risk-on environment but doesn't coincide pinch excessive speculation, arsenic discussed earlier. Hence, it corroborates our value action thesis that we are still successful nan early stages of a sustained marketplace recovery.

QQQ value floor plan (weekly)

QQQ value floor plan (weekly) (TradingView)

Breakout traders/investors request to beryllium cautious astir anticipating a patient upside breakout, arsenic we deliberation a pullback from nan existent levels looks much likely.

Coupled pinch overbought momentum, corroborated by nan surge successful nan 10Y yields, a pullback will besides thief to shingle retired immoderate anemic buyers who chased nan caller momentum, which stalled successful early February.

As nan QQQ ETF remains successful a medium-term downtrend, trend-following investors are apt still connected nan sidelines, waiting for nan "golden cross" earlier emerging from their hiding to participate successful nan recovery. We judge it besides explains why nan media remains pessimistic complete nan caller wide marketplace recovery, arsenic nan Fed is still expected to beryllium hawkish.

However, investors must ever retrieve that nan marketplace is forward-looking. With liking complaint futures already pricing successful a much hawkish Fed, nan adjacent pullback will apt supply much clarity connected nan consequent bargain levels to adhd exposure.

But we don't expect October lows to beryllium breached, truthful we promote investors to bargain confidently connected its adjacent retracement.

Rating: Hold (Revise from Buy).

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Editor: Naga

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