|In the monthly chart of the PowerShare QQQ Trust (QQQQ) you see an inverted head & shoulders formation. The pattern is a bullish trend reversal that breaks in an upward direction, initiating a fresh uptrend for the stock/index. The pattern in Figure 1 took three years to complete. A bearish rally in QQQQ began in late 2007 from 54.30 levels and gradually slipped below the 50-day moving average (MA) support. Though the stock tried to recover with the 50-day MA, the high bearish pressure dragged the stock lower. The small recovery period formed the left shoulder of the pattern. By the time the stock plunged to $25 in 2009, you could see huge selling volume. As QQQQ reversed from the lower level, buying pressure increased, forming the lowest bottom (head) of the pattern. Gradually, the pullback rally rushed upward and formed the right shoulder as well. Thus, the inverted head & shoulders pattern is completely visible on the monthly time frame in Figure 1.|
|FIGURE 1: QQQQ, MONTHLY|
|Graphic provided by: StockCharts.com.|
|The relative strength index (RSI) (14) has also formed the same pattern, indicating a possible bullish breakout. The moving average convergence/divergence (MACD) (12,26,9) has surged in positive territory, suggesting a bullish momentum in the breakout. |
But the most important are the trend indicators in Figure 1. The bullish breakout of the pattern would reverse the existing downtrend and begin a fresh uptrend. However, we can see that the average directional index (ADX) (14) has plunged in a weak region below 20 levels. Though the downtrend has reversed, the uptrend has not developed for QQQQ. The ADX (14) is suggesting consolidation.
|The pattern has breached the neckline resistance (red dotted line) and has established new support. But the previous high at 54 levels is likely to suppress the breakout rally of QQQQ. The upper dotted line shows an immediate resistance. Thus, QQQQ would consolidate under this resistance line. After converting the immediate resistance to support, QQQQ would reach the target level of 79. The potential target is measured by adding the length of the head to the breakout level, and therefore, 50 - 25 = 25 + 54 = 79. But currently, the breakout rally of QQQQ would consolidate.|
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