QQQ: The Next Leg Higher Will Be Painful For Bears (Technical Analysis)

SrdjanPav

The NASDAQ-100 (NASDAQ:QQQ) has rallied more than 13% from its cycle low and gaining momentum approaching key technical levels. We see the next leg in the market as higher based on several shifting dynamics. Record inflation, Fed rate hikes, and poor consumer sentiment are no problem here for stocks with a recognition that data can improve going forward. Simply put, many of the headwinds responsible for the historic volatility this year particularly among high growth and technology sector names are essentially old news at this point. We are bullish.

Data by YCharts

Bullish Macro Developments For Stocks

This article will focus on the technical picture but it’s important to know that what we see as a tradable bottom in the NASDAQ is also consistent with fundamental and macro developments. We’ve covered a bullish case in stocks in recent articles. As a recap, the following factors highlight why we may be at a critical turning point for the bulls to get back in control.

There are signs that the U.S. economy may have passed “peak inflation” with the potential for confirmation in the July and August CPI data. The correction lower in commodities including gas prices well off their highs suggests cooling inflation going forward. From there, we have the July Fed meeting set for next week where the group is widely expected to hike the policy rate by 75 basis points.

Putting the two together is a sign the Fed’s strategy is working and may be enough to mark a consequentially positive “peak hawkishness” scenario by removing the urgency to get more and more aggressive on rates into 2023. All this is in an environment where the economy has at least been relatively stable. The June payrolls report and recent retail sales data have been stronger than expected which provides some evidence the economy is capable of emerging out from what has been a rough patch.

Finally, we can bring up the start of the Q2 earnings season which has been clouded by overall low expectations. It’s understood the start of the year and period since April was difficult for a lot of companies which explains the deep selloff in several underlying QQQ names over the period. If much of the weakness in mega-cap tech leaders was based on the deteriorating outlook, what could evolve over the next few weeks as these companies begin reporting is a “buy the news” type of trade.

Netflix, Inc. (NFLX) rallying higher as it beat its earnings estimate could be an example for other tech names to follow. There is also a case to be made that valuations are very attractive considering the top QQQ holdings remain profitable, generating strong cash flow while trading at historically cheap multiples.

Improving macro data can help add bullish momentum to the market. Considering what remains a high level of pessimism towards risk assets, the setup here with bears forced to cover and chase stocks higher can work as a powerful dynamic.

Data by YCharts

Let’s Get Technical

First, it’s important to note that QQQ reached a low of $269.28 on June 16th before the more recent climb was higher. Notably, this range of just under $270 represented an important area of technical support going back to Q3 2020. In other words, QQQ was able to hold what was nearly a 2-year low.

Seeking Alpha

Zooming into the action from the last 3-months, a key point here is that QQQ is currently trading above $300 which effectively closes a gap down from June 10th which at the time was based on the selloff that day from the hotter-than-expected May CPI report. In other words, the action in QQQ has reversed the entire decline over the past month.

Seeking Alpha

The next critical level to watch is ~$315 representing the high from early June. This is a good near-term upside target we expect the current momentum to reach over the next few weeks. A move higher would confirm a technical breakout and a very positive trading signal. Looking down the line, the July CPI report set to be released on August 10th could be the catalyst for this move marking a major regime change if the data confirms a trend lower in inflation.

Seeking Alpha

Over the past year, QQQ has had 3 “failed breakouts” since Q4 2021 at the $400 level, ~$375 in early Q2, and the call here is that we can finally turn the tables with this current move.

Seeking Alpha

Bullish QQQ Trade Idea

With QQQ currently trading around $300, we see an interesting ongoing trade idea. Assuming we can get a breakout and sustained rally higher above $315, the upside move target over the next several months could put $375 back in play. Using the recent consolidation low area of ~$280 as a stop loss, a long trade here buying QQQ to make $75.00 while risking to lose $20.00 is an attractive 4x-to-1x reward to risk setup with a time frame of three to five months.

Individual stocks and high beta QQQ holdings would likely outperform the upside in percentage terms. The attraction of the QQQ ETF is its relative diversification with 100 holdings that can work as a core holding of a diversified portfolio for the long run.

In terms of risks, we have to be mindful of the possibility that macro data still deteriorates further. An unexpected twist of inflation data re-surging higher would undermine the bullish outlook. The ongoing Russia-Ukraine conflict and the possibility of an escalation into Europe is also a tail risk event that would open stocks to a leg lower.

Final Thoughts

We see the current market environment as a great spot to get bullish and position to the upside. It won’t be a straight line higher but now is a good time to add exposure to equities. The beaten-down QQQ ETF offers a great opportunity to own a basket of high-quality companies. The possibility that the market stages a heroic rally to end 2022 would be surprising for a lot of investors and traders.

The reason we say that the next leg higher will be painful for bears is that there is a large segment of the market that remains excessively gloomy which may be driving some behavioral biases. As it relates to cognitive dissonance, investors should be willing to accept that market economic conditions with the potential for a recovery going forward would be positive for stocks. We work with probabilities and the case here is that we view risks as tilted to the upside. Traders covering shorts and chasing new momentum names higher can end up surprising a lot of people.