QQQ Approaches Key Retracement

09/08/03 12:05:16 PM

by Arthur Hill

Both the weekly chart and overall trend for QQQ are clearly bullish, but the retracement, pattern, and resistance-turned-support could spell trouble in the weeks and months ahead.

Security: QQQ
Position: N/A

First, QQQ's advance to above 34 has retraced 62% of the prior decline (43.24 to 19.76). This Fibonacci number (.618 or approximately 62%) marks a classic retracement amount and QQQ reached this level the first week of September. While the retracement target alone is not enough reason to turn bearish, it should serve as an alert for a potential trend change.

Graphic provided by: MetaStock.

Second, the advance traced out an ABC retracement and rising wedge. In Elliott wave theory, ABC patterns run countertrend. In an uptrend, we would expect to see an ABC correction or downside retracement. In a downtrend, we would expect to see an ABC reaction rally or upside retracement. These ABC patterns would be expected to retrace 38-62% of the prior move. The resulting advance also looks like a rising wedge, which is typical for a reaction rally or countertrend move.

Third, QQQ is close to broken support extending back to February 2002. A basic tenet of technical analysis is that broken support levels often turn into resistance. Resistance from the February 2002 support break held in May 2002 and July 2003 (red arrows). The stock moved above this resistance level in late August, but has yet to exceed the 62% retracement mark.

The evidence points to a possible peak and near-term high, but momentum is still bullish as the stochastic oscillator has yet to break down. After a brief dip, the stochastic oscillator moved above 80 again this week for an overbought reading. Notice that this oscillator moved above and below 20 (oversold) a number of times from June to October. A playable advance did not materialize until the oscillator broke above the prior two reaction highs (green arrow). Similarly, the oscillator formed a reaction low in August and I would give it a bullish bias as long as this low holds. A move below 80 and below the August low (66.32) could be used to confirm a support break at 30 (QQQ) and a significant trend change.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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QQQ Approaches Key Retracement

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