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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
When it comes to earnings season, this week is as big as it gets.
The heavy hitters in the market – Apple, Microsoft, Alphabet (Google), Amazon, and Facebook – have already released, or are scheduled to release, quarterly results.
Also, investors can tune in to Berkshire Hathaway’s famed, annual general meeting (AGM) on Saturday. During it, the “Oracle of Omaha” Warren Buffett will discuss the state of global markets.
That’s a lot of news for the market to absorb this week.
Although each of these reports will generate plenty of headlines and volatility, today I’m going to talk about the Invesco QQQ Trust Series 1 (QQQ).
It reflects how these mega-cap stocks are performing and will determine the overall direction of the markets.
Let’s take a look at the QQQ chart…
Invesco QQQ Trust Series 1 (QQQ)
Source: eSignal
When we last checked in on QQQ (red arrow), it was in a turbulent period.
It had fallen heavily from the start of 2022, with both moving averages (MAs) trending down.
But after finding support, QQQ began to rally strongly by mid-March.
Back then, I wrote that while investors could enjoy the bounce, they needed to be ready to sell into any rally.
My prediction was right…
In less than two weeks, the Relative Strength Index (RSI – lower portion on the chart) formed an inverse ‘V.’ At the same time, QQQ topped out at ‘A’ before falling lower.
With the RSI breaking down below support (green line), QQQ is looking vulnerable once again.
QQQ is now testing the same support level (orange line) that it bounced off of in March.
This support level will be crucial over the coming weeks, if not months.
Holding support (or resistance) is a battle between buyers and sellers. When a stock or index hits support – a level it has previously held – new buyers enter the market.
And if that support holds again, the weight of that new buying will propel a stock even higher.
On the other hand, sellers are trying to push the stock lower. They know a bigger fall could happen if that support level fails.
It could happen not only from new sellers joining onto the short trade, but from those that went long getting stopped out.
All those stop loss triggers (typically just below support) add to the selling momentum.
QQQ’s actions around support this week will influence how the market performs for the next quarter. The RSI is also key to what happens next.
Let’s take another look…
Invesco QQQ Trust Series 1 (QQQ)
Source: eSignal
The RSI is quickly closing in on oversold territory at the lower gray line.
The last time this happened (red circles), QQQ went on to bounce strongly.
If the RSI forms a ‘V’ from oversold territory and QQQ holds support, then there could be another sharp bounce – providing an opportunity for a brief, long trade.
However, there’s still a lot of weight hanging over this market…
A break below support – on top of a minimum 0.5% (and even potential 0.75%) rate rise at the Fed’s next meeting – could see sellers grab hold of this market.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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