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CONSOLID FORMATION


QQQ, Where Next?

06/28/01 03:37:24 PM
by Dennis D. Peterson

Testing support or resistance levels often means something gives - sometimes dramatically.

Security:   QQQ
Position:   N/A

Continued retesting of support or resistance generally means price is going to move in the direction of the retest. If the pattern is an ascending triangle, it is the continual retesting of the horizontal resistance that often leads to an upside breakout. For the same reason, the continual retesting of the horizontal resistance of a descending triangle often leads to a downside breakout. For a stock that is trendless- moving sideways in a price channel- there are retests of both support and resistance.

When a market becomes trendless and enters a price channel consolidation pattern, look for two items: the number of times that support or resistance levels are retested and the volume at the retest. There may be some clues coming into the consolidation that are predictive. Another analysis technique is to ask yourself, if this trend is to continue then what do I expect to see?

To analyze a price channel consolidation, start by identifying where resistance or support may be encountered. For the Nasdaq -100 Index (QQQ) a clue is given with the gap labeled "breakaway gap?", occurring on 3/9 in Figure 1. The question arises because the volume is only 79 million shares and is barely above the 10-day exponential moving average (Figure 1: volume chart on bottom). From 3/9 prices continue to tumble to a pivot on 4/4.


Price turns up after 4/4 and an unquestionable breakaway gap occurs to the upside on 129 million shares on 4/18. The upside breakaway gap establishes support for price moves to the downside. How far up will price go? The first test comes on 4/20 in the area labeled F. If price is to continue going up what you want to see is a retracement that is a three day reversal. Price retracement from area F to area A (4/23 to 4/25), meets the criteria halfway. The third day, 4/25, does close higher than the open, but on the fourth day the close is lower than the open. The upswing from 4/4 looks like it has ended.

The next move up goes to area G and there are several retests. Could this mean an upthrust or a spring later on? It's disappointing that after the breakaway gap on 4/18 there was no evidence of a runaway gap. The push up isn't all that strong. The retest at area B is short and brief. From area F to area B volume has steadily dropped off. Sellers have stepped aside. But where are the buyers? No one is jumping in when price goes down. The price rise from A to G is out of gear.



Figure 1: QQQ daily price and volume history.
Graphic provided by: MetaStock.
Graphic provided by: Data vendor: eSignal<.
 
With retests at areas F and G a breakaway gap or an upthrust (false breakout) might occur. What happens? On 5/22 with less than average volume, price goes above the area F high of 51, then immediately retreats. Price on 5/22 rises on an upthrust. It's almost as if the questionable breakaway gap of 3/9 provided resistance. All in all this is not shaping up for long positions.

Areas A, B, C, and D are all tests of the support provided by the breakaway gap of 4/18. Besides retesting the support provided by 4/18, the rise in price after area C is also out of gear. On 6/14 the gap is filled. After 6/14 a price rise to QQQ = 44 is on slightly diminished volume. If there is continued retest of QQQ = 41.5 the likely case is for a downside move.

If you are looking to go long on QQQ you want some assurance that you won't be the only person buying. Since mid-April each time price has gotten low after a week or so, the upside doesn't find many buyers. Out of gear price gains. No springs but instead an upthrust. Filling an upside breakaway gap. The Nasdaq is oversold on an intermediate basis, but on a short term basis is overbought. The only good news for longs in this morass is that short sellers should be covering.

With the Federal Reserve yet to vote on short term interest rates this week and portfolio dressing up as well, I would not read a whole lot into this week. I am sure the news will fit the results. If it is a 25-point basis point cut some will say this is what the market needed, while others will say it is priced in and makes no difference. If it is a 50-point basis cut, some will say this is just what the market needs to take off, while others will say that if the Federal Reserve had to cut rates that much the economy is in deep trouble. Take your pick. In a bull market being oversold would push prices up, whereas a bear market would take the short term overbought condition and push prices lower. Looking at the chart I see indecision, and a general move down and a lack of support.




Dennis D. Peterson

Market index trading on a daily basis.

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