Are The QQQQs Close To Being A Short?

02/06/07 01:39:07 PM

by Koos van der Merwe

Can the chart of the Qs tell us which way the market is going?

Security: QQQQ
Position: Sell

The QQQQs represent the NASDAQ index. They are one of the many exchange traded funds (ETFs) available, are very tradable and, by the size of the volume traded daily, are extremely popular with traders. But are these traders telling us something? Are their trading activity suggesting the direction of the Qs for the future?

FIGURE 1: QQQQ, DAILY. A QQQQ chart shows the head & shoulder formation that is a recurring pattern.

Graphic provided by: AdvancedGET.

Figure 1 is a daily chart with three definite and similar patterns highlighted. All three could be head & shoulder patterns, some larger and more spread out than others, but all have the same pattern and are supported by the moving average convergence/divergence (MACD) (13,26,9), which appears to be giving a divergence sell signal.

How far can it fall? Trendlines suggest support at 37.97 and 36.96, approximately. Fibonacci ratios as shown suggest 39.31 at the outside. Do note that in all the previous rises, the fall always exceeded the Fibonacci ratio of 0.618. We could therefore expect the target to be either of the two suggested for the trendline.

FIGURE 2: QQQQ, DAILY. A short-term buy will soon become a possible long-term short.

Graphic provided by: Omnitrader.

Looking at a chart of Omnitrader, however, we can see how the program gave a buy signal on December 28 as the QQQQs rose into a high of 45.40 on January 16, 2007 (Figure 2). A short signal was given on January 17, with a buy signal again on January 26. The short-term trend is therefore up, probably to form the right shoulder of a head & shoulder pattern (see Figure 1). Volume as the price rose has also been falling, a sign of weakness ahead.

I would not be a buyer of the QQQQs at the moment, but I would sell short once Omnitrader or the head & shoulder pattern confirmed a sell signal.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.