As we start another fun filled day of trading I wanted to keep my notes simple and look at the NASDAQ 100 index ETF (QQQ). The chart below reflects what is happening in the broad market and gives us some insight into what opportunities are ahead. If they don’t pan out then we will be aware of the downside opportunities as well. In this case the index is trading in an uptrending channel, and the outlook is more positive than negative.
Despite the recent selling and test of support the index remains in a positive trend and pattern. The 10 day moving average is currently acting as the mid-trendline and moving in a positive direction short term. The test of support at $63.15 is in play. A bounce and move back towards the upper end of the range would establish another higher low for the trend. If however, the test moves to the bottom of the range and tests the lower trendline the uptrend would remain in play. Thus, the index remains in a positive trend short term.
As investors we tend to get too fixated on what we believe or more often, what we want to happen. In this case all the news around the market is essentially negative. That begs the question… why the positive trend? The simple answer is the data is longer term focused and the expectations are short term. Thus, the trend is moving higher short term. The big negative in the market are events that are happening and developing over the next 6-9 months. The current issues are stimulus from the central banks and anticipation of earnings. Thus, the short term is more positive (speculation only) and is pushing the index higher. In time both views may be proven to be correct. But, you and I as investors have to put aside our bias and track the trend of the market based on the time horizon we are attempting to benefit from now or later.
The NASDAQ 100 has benefited from the success of Apple. The stock now accounts for nearly 19% of the market cap or weighing of the index. Thus, as Apple goes so goes the index. The chart below of Apple shows the recent move higher off the May low. The current uptrend is having an influence on the trend of the index. This is worthy of our attention if we are going to invest money into the index. In fact, some see the QQQ ETF as a more diversified way of playing Apple stock. Either way, we should be aware of our surroundings before putting our money at risk.
How do we play the current movement in the index? If we hold the current support level at $63.15 look for an entry point near the $63.70 mark. If we test lower, let the support hold and look for the entry relative on the bounce. The risk of the trade is a break from the current trend or pattern. Thus, $61.50 would be a reasonable stop on any positions. The key is to have a plan for the trade and the discipline to follow the plan. Apple is in play as well on the break above resistance at the $590 level. There is some resistance at the $620 mark, but a move back towards the previous high of $645 is in play.
On a side note, the major indexes are testing support again? The weakness remains with Metals (DBP), Energy (XLE) and Crude Oil (OIL). The relative strength of the market is in Biotech (IBB), Retail (XRT) and Real Estate (IYR). The trend is your friend and fighting it only gets you in trouble. The current trading range remains in play and either you accept the wide range of volatility and risk, or remain in cash and let the market tell you when the best opportunity exist going forward. Either way, be disciplined and focused on your objective.