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The Nasdaq has had a big 2024…
Since beginning its run in October last year, the index has rallied just over 50%. It has made a succession of new all-time highs.
Investors dream about this kind of market.
But a rally like this can also leave you vulnerable to a surprise fall – just like we saw in August when the yen carry trade unwound.
Since that August sell-off, the Invesco QQQ Trust Series 1 (QQQ) – which tracks the Nasdaq – has recovered strongly. And QQQ looks set to break higher after a brief pullback.
But I’m worried that investors are too complacent once again…
Testing Resistance
In the chart of QQQ below, the 50-day Moving Average (MA, blue line) shows its long-term uptrend. But it hasn’t been all one-way traffic…
You can see the diverging pattern from June to July (orange lines). That led to the sharp sell-off in August.
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
When the Relative Strength Index (RSI) makes a lower high like this (lower orange line), buying momentum is waning. That typically precedes a fall.
And that is what we saw…
QQQ sold down sharply as the RSI fell and traded in the lower half of its range.
After recovering, QQQ ground higher. This coincided with the 10-day MA (red line) breaking back above the 50-day MA.
Adding to the bullish sentiment, the RSI traded mostly in the upper half of its range (above the 50% level).
As you can see, QQQ gapped higher off the back of Donald Trump’s win… but that move soon fizzled out.
Take another look:
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
QQQ ran into short-term resistance (green line) and retreated around the middle of last month.
Since then, though, momentum has been slowly building. That has pushed QQQ right back up against resistance.
So, what should investors look out for next?
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More Than Technicals
With momentum building, QQQ will likely break up through resistance. And this could see the market “melt-up” for the rest of 2024.
But investors shouldn’t become complacent even if the market makes fresh highs. There’s plenty of tinder just waiting for a spark.
Sometimes markets grind higher like this until investors find a reason to sell… especially if the RSI reaches overbought territory (upper gray dashed line).
Also, keep in mind that volatility is tracking at low levels again. The CBOE S&P500 Volatility Index (VIX) is back where it was in July.
If the VIX turns higher alongside the RSI tracking in overbought territory… then watch out. That’s a potent scenario for a fall.
Additionally, we should pay attention to more than technical indicators on the chart…
We need to consider other factors… not least of which will be President Trump’s agenda.
With just 47 days until Trump’s inauguration, we need to prepare for the impacts of his proposed tariffs and a potential trade war.
And then, of course, there’s the big question about what the Fed will do with rates…
The current year-plus rally got started off the back of prospective rate cuts.
If those cuts get pushed back or put on pause at the Fed’s meeting later this month, that could light the match for a sell-off.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict