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Crossroads For The Qs03/09/10 11:13:13 AM
by Alan R. Northam
Sometimes in our analysis of the stock market, or an individual stock, we come to a crossroads, a split in the direction of the trend where it is possible for price to take one of two differing paths. The QQQQs are at such a crossroad. It is possible that the QQQQs could continue to trade higher from current price levels but it is also possible for the Qs to turn back down.
|In January 2010, the PowerShares QQQ exchange traded fund (ETF) (QQQQ) made two equal highs at 46.64 as indicated by the two red arrows forming a short-term double-top reversal pattern. The reason it was a short-term double-top reversal pattern is that the two peaks were only one week apart. Short-term reversal patterns can last from a few days to a few weeks. This short-term double-top reversal pattern lasted almost three weeks before turning back up. See Figure 1.|
|FIGURE 1: QQQQ, DAILY. Here's 46.64 as an important price level. The chart also shows resistance line, Andrews pitchfork, and the RSI.|
|Graphic provided by: AmiBroker.com.|
|Now the Qs have traded back up to 46.64 where it stopped dead in its tracks. Could this be the formation of a much larger double-top reversal pattern? While it is not necessary for price to remain below 46.64 to form a large double-top reversal pattern, that price did stop right at 46.64 indicates that this price level is important. As a result, I have added the horizontal resistance line to the chart. With three touches of this line, it indicates that this line represents a strong line of resistance for this market.|
|In addition to 46.64 being an important price point, I have drawn the Andrews pitchfork on the chart. The median line of the pitchfork, labeled ML on the chart, is also an important line. According to Alan Andrews, this line represents a possible reversal area. Andrews noted that while the median line represented a possible reversal area, he also noted that price could could move along the median line for some time before actually reversing direction. Note that price moved up to the median line in early March and moved along the median line since, just as Andrews noted price would often do. To help determine when price might actually reverse down, Andrews would often use a momentum indicator. For this reason, I have added a momentum indicator. For our momentum indicator, I have chosen to use the relative strength index (RSI) but any momentum indicator could be used.|
|There are two ways to use the RSI; one method is to use the 70% and 30% lines during a sideways trading range to represent overbought or oversold market conditions, and the other is to use the 80% and 20% lines in a trending market to represent overbought or oversold. As can be seen from the RSI, it has not yet even reached the 70% overbought line, let alone the 80% line if we consider the Qs to be in a trending market. Therefore, based upon momentum, the QQQQs could have further to go on the upside before reversing back down.|
|However, since the price level of 46.64 seems to be an important price point, and the horizontal resistance line a strong line of resistance, there exists a possibility that the QQQQs could turn down from the current price level. As a result, we should pay close attention to the price action of the QQQQs from this point forward. If price should break down below the lower line of the pitchfork, labeled L-MLH on Figure 1, that would signal a reversal back to the downside. Or if RSI breaks down below its trendline, that too would signal a reversal in trend back to the downside. While it is possible for the QQQQs to keep moving higher, the current price level of 46.64 seems to be important and bears our careful attention, as it could mean that an important double-top reversal pattern is developing.|
Alan R. Northam
Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at email@example.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.
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