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Larry’s note: Welcome to Trading with Larry Benedict, the brand new 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. 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… |
Just over a month ago, we took a deep dive into the Nasdaq 100…
It’s an index that tracks the 100 largest non-financial stocks listed on the Nasdaq – including stocks like Facebook, Apple, and Tesla.
Because of that, it’s a great way to trade the technology sector.
One exchange-traded fund (ETF) I watch that tracks the Nasdaq 100 is the Invesco QQQ Trust (QQQ). When we looked at QQQ last month, it had been struggling to make new highs.
At the same time, the relative strength indicator (RSI) was trending down, showing a decline in momentum.
That action was warning me about a potential change in direction. Because of that, I wrote that I believed QQQ was looking vulnerable.
Let’s see how things turned out in the chart below…
QQQ Price Chart
Source: eSignal
The two red lines show the divergence between the share price and the RSI. In other words, while the share price moved higher, the RSI moved lower. When you see this type of pattern, it can often indicate a potential reversal.
At first it might seem a bit contradictory… After all, a rising share price should be a good thing.
Although the share price was ticking higher, the RSI was telling us that QQQ was doing so with declining momentum. That meant buyers were losing their conviction to buy and hold the stock.
When that conviction to hold a stock goes away, it often results in the share price falling.
And that’s exactly what happened with QQQ…
QQQ rolled over and began falling towards its 50-day moving average (MA) – the dark blue dotted line. If QQQ had broken through the 50-day MA, that could have seen a fresh wave of sellers coming into the market, pushing QQQ’s price even lower.
That’s when I wrote that QQQ was looking vulnerable (the green arrow on the chart).
As you can see, QQQ made another move higher before once again running out of steam…
Throughout the first week of September, QQQ traded sideways. This coincided with the RSI indicating an overbought position.
As momentum subsequently fell (falling RSI), that brought the QQQ share price down.
QQQ has been trending down since September 7 – even before the further falls this week.
The big difference between this fall and the one I wrote about last month, however, has to do with the 50-day MA.
Back in August, QQQ bounced and rallied higher before it touched the 50-day MA.
However, on Monday this week, QQQ gapped straight down below its 50-day MA.
Now, it’s right around the same price as when I wrote about QQQ back on August 19.
When you get a big down move like that, you can be sure there will be plenty of swings.
The next test for QQQ, however, lies with the RSI…
For QQQ to rally from here, we’ll need to see an upturn in the RSI. Meaning, the RSI forming a ‘V’ from an oversold position.
We’ll also need to see QQQ trade back above, and hold, its 50-day MA.
Right now, both are hanging in the balance…
If the RSI doesn’t bounce, and the 50-day MA starts to trend lower, then QQQ could be in for a substantial move lower.
So, the falls we saw at the start of the week could be a sign of further things to come.
Stay tuned…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
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Great trade!
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