Will The QQQQ Come Around?

01/24/07 10:46:37 AM

by David Penn

After a bruising, week-long correction, positive divergences look to bring the quadruple Qs back.

Security: QQQQ
Position: N/A

As Jack Steiman of TheInformedTrader.com likes to say, it is amazing how quickly sentiment can shift to negative in a bull market.

There should be no doubt that the NASDAQ 100, or its exchange-traded fund the QQQQ, is in a bull market. Since bottoming in July 2006 and breaking out above the 50-day exponential moving average (EMA) in August, the QQQQ has not closed below that intermediate-term moving average since (save for one day, December 22).

FIGURE 1: NASDAQ 100 TRUST SERIES (QQQQ), HOURLY. The sharp correction in mid-January took the QQQQ down to almost the 78.6% retracement level. Bears need be wary of pressing their bets.

Graphic provided by: Prophet Financial, Inc.

However, the failure of technology stocks to lead the market thus far in 2007 and the subsequent sharp collapse in the NASDAQ that began in mid-January have clouded this idea. Good news in stocks like Bank of America, Apple, and Johnson & Johnson has been met with, at best, a shrug and at worst, strong selling. So it is hard to begrudge the bears their time in the sun.

But could begrudging time be just around the corner? Figure 1 shows a market that has corrected a great deal of its advance from the mid-December 2006 lows below 43 — almost 78.6%. While it is certainly possible that the correction has not run its course and that a total and complete retracement of the advance is what is to come, traders should realize that there are those who successfully bet on this correction and that the only way for those savvy punters to profit on their well-made wager is to start buying — covering — their shorts. The fact that the market stalled at the 61.8% retracement level and started to bounce before plunging lower once again suggests to me that the market might have been looking for a bottom even sooner.

FIGURE 2: NASDAQ 100 TRUST SERIES (QQQQ), HOURLY. Positive divergences in both the moving average convergence/divergence (MACD) histogram and the stochastic suggest that a bottom of some degree has been established at 43.5. Near-term resistance waits at 44 and 44.25.

Graphic provided by: Prophet Financial, Inc.

I had been studying the 15-minute charts of the QQQQ and thought there was a good chance for a bounce on January expiration based on positive divergences in that time frame. The bounce was minimal at best, as the QQQQ rallied about 25 cents before rolling over and moving significantly lower. But perhaps the second time will be the charm as a new set of positive divergences — as shown in Figure 2 on the hourly chart — have appeared and look more than capable of encouraging the bears that the "trade has been made" and that it is time for profit-taking and short-covering.

The big hurdle for the QQQQ to clear is at 44.25. This is the level that repelled the bounce that I anticipated from the 15-minute chart. I suspect the QQQQ will fare better in its next attempt to break through the 44.25 level, given in part the larger positive divergence that will be backing it up. Should the QQQQ reach this level, there is a swing rule projection that suggests a move as high as 45. In order to get the swing rule projection, subtract the value at the low from the value at the breakout point to get the size of the swing, then add that amount to the value at the breakout point. Interestingly enough, 45 also represents the next area of potential resistance beyond 44.25.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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