After the Nasdaq lost one-third of its value since the start of 2022, weary investors could be excused for giving it a wide berth.

Especially, with high inflation setting the Fed up for another mega rate rise when it meets next week.

But against the ongoing negative outlook, we must remember that markets look to the future.

And usually, they overshoot in both directions.

So, when indices or stocks revert to their mean, there can be plenty of trading opportunities.

That’s why the current price action in the Invesco QQQ Trust Series 1 (QQQ) has me scoping for some potential trades.

Check out QQQ’s chart…

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

QQQ’s downward trend began after it peaked at ‘A’ in November 2021.

In early January, the 10-day moving average (MA – red line) crossed down below the 50-day MA (blue line) and then began moving lower.

Apart from QQQ making a lower high at ‘B’ in late March to early April, the 10-day MA has remained below the 50-day MA (a bearish signal).

The Relative Strength Index’s (RSI) action is another sign of this downward trend.

Each of those lower highs at ‘A,’ ‘B,’ and ‘C,’ coincide with the RSI inverting from lower highs at ‘1,’ ‘2,’ and ‘3.’

After breaking down through support (green line) in early January, the RSI has remained in the lower half of the chart for most of the down move (bearish signal).

The only exception was when the RSI briefly broke into the upper half of its band and QQQ made the lower high at ‘B.’

Take another look…

Invesco QQQ Trust Series 1 (QQQ)

Source: eSignal

QQQ tried to rally again at ‘C,’ but lost momentum and rolled over when the RSI failed to hold ground above resistance at ‘3.’

After forming a ‘V’ near oversold territory (lower grey dashed line), the RSI made higher lows in mid-June.

Since then, the RSI has been testing resistance again.

It’s now showing promising signs of breaking into the upper half of its band.

So, what can we expect from here?

Well, when we looked at QQQ on April 28 (red arrow), it was retesting a price level it held in February and March.

However, since the RSI was stuck in the lower half of its band, that support level failed and QQQ continued to fall.

But this time – despite the RSI being stuck in the lower half of its band – QQQ was tested and held a short-term support level (orange line) for up to two months.

Meaning, after holding support with little to no momentum, QQQ is positioned to rally if the RSI breaks above resistance and stays there.

This could provide the opportunity for a potential long trade.

With QQQ closing in on its 50-day MA, the next bullish signal would be for the 10-day MA to break above the 50-day MA, and take out its recent peak at ‘C.’

When stocks overshoot, we need to be ready to profit when they revert to their mean…

Then, look to proven indicators like the RSI and MA – along with key price levels – to help identify strong trade setups.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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