Hi Reid,
I would mark the first chart support at $38.90. You can see in the chart below that the bottom of the relatively volume heavy white candle 12 sessions back is labeled $38.90, and the next label (less volume) is at $39.09:
stockcharts.com[w,a]daclyyay[db][pb40!d20,2!f][vc60][iLg!Lyb20,2.0]&pref=G
This level also is very near the lower BB rail. On the AskResearch charts, that would be $39.07, but in Stockcharts the lower BB sits currently at $38.91. This lower rail is just above the 40 sma ($38.77), and the lower BB rail has been tracking the 40 sma now since the beginning of December.
Ordinarily, I would say the combination would provide sufficient support to hold QQQQ from trading down further. But there is a problem: the BBs are extremely contracted.
stockcharts.com[w,a]daclyyay[dd][pb40!d20,2!f][vc60][iLg!Lyb20,2.0]&pref=G
The width of the BBs is currently only 1.35, as you can see on the above chart. This low extreme was reached only once in the last year. That occurred towards the end of June, when QQQQ was trading at about $36.00. After that, the market rallied for about a week, then suddenly reversed and sold off sharply for the next 5 weeks, dropping almost 15% from $37.57 to $32.07.
When considering the BB width, one must take into consideration that the absolute value of the width is partly a function of the level at which QQQQ is trading; a BB width of 2.5 would be more or less normal range right now. But if QQQQ were trading at say $75, a BB width of 2.5 would be contracted. Conversely, if QQQQ were trading at $10, a BB width of 2.5 would be excessively expanded. Unfortunately, Stockcharts does not normalize the BB width for the absolute value of the price, so you have to ballpark figure this out yourself.
Still, the difference between where QQQQ was trading in July, and where it is trading now is about 10%. So, tack on 10% or so to the current BB width, and that works out to 1.49---and that is contracted.
On the weekly 2 year chart, you can see dramatic expansion of the BBs to the upside, to levels not seen in over 2 years:
stockcharts.com[w,a]waclyyay[de][pb40!d20,2][vc60][iLg!Lyb20,2.0]&pref=G
At first glance, this would seem inconsistent with the BBs on the daily chart. But closer inspection reveals that the most likely resolution of this unstable condition is for QQQ to trade down, which will pull the upper rail down and tend to resolve the expansion. Following that, a trading range would be the most likely scenario, until the BBs again regress towards a more reasonable width.
So my read is that this lower BB rail will not hold, and QQQQ will trade against the lower BB rail to expand it on the daily chart. On the weekly chart, this will pull the upper rail down while the lower rail stops going up, then remains relatively stationary, relieving the excessive expansion.
That means your first firm support at $38.00 is a very likely target, and a potential reversal point. This also roughly coincides with the January peak, which will offer chart support.
Another factor favoring QQQQ trading down to $38.00 is the excessive resistive volume that has built up over the last week or two. That must be worked off sooner or later.
Should QQQQ trade down to $38, that would be a drop of about 4%, and I will most likely cover the short and either go to cash, or reverse and go long if the chart/technicals look favorable, and if I see a solid volume surge that stops QQQQ from trading down further.
So the current overbought state and all these technical issues can be resolved by QQQQ trading down to about $38.00, reversing there, closing the week just above $38 to coincide with the January peak, then trading sideways for a while from there.
Bottom line: We are beginning a medium term correction, followed by consolidation, but the long-term uptrend is intact and not threatened at this point. IMHO $38.00 is very likely this week (or early next week at the outside), and that support level will hold. A trading range will then follow. This would make it wise to go short now, then go to cash when support is reached (if it looks to be holding) until a stronger trend resumes.
T
Note: the put/call also shows a sell signal that occurred several sessions ago. |
