Take a Step Back Before Initiating Any Shorts in This Market
It's been a bumpy ride for the Invesco QQQ Trust as politicians are infusing real uncertainty into the market.
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After hitting a new all-time high less than three weeks ago, it’s been a bumpy ride for the Invesco QQQ Trust QQQ.
Rejection at the $540 level resulted in a drop of 10% from those highs in less than two weeks. Admittedly, it doesn’t feel great, but traders should step back and examine the longer-term picture.
The recent pullback remains in line with the pullbacks we experienced in April 2024, August 2024 and October 2023. The April pullback roughly measured a 38.2% retracement, while the August drop took us to the 50% retracement level. For comparison, QQQ would need to fall another $25, or 5%, to reach the 38.2% retracement from the recent highs.
I’m focused on the 50-week exponential moving average (EMA). To find a time when QQQ traded below the EMA, you would have to go all the way back to the first quarter of 2023. That’s two full years of trading. We tested that level in August 2024 and October 2023, but we’ve barely challenged the 25-week EMA aggressively, let alone the 50-week EMA.
Should we close below $482.40 this week by more than just a dollar or two, then Monday’s action could be dicey. We are getting a bit extended to the downside in the short term, so I would be cautious about initiating new shorts or getting overly bearish, but this setup hints more toward selling bounces that reach the $500 to $510 range.
The market is littered with unknowns. Tariffs. Inflation. Trade wars. Said another way: politics.
In my experience, politicians generally equate to trading frustration. The markets hate unknowns, and politicians are the head chefs famous for cooking up the unknown. Policies often chase votes and short-term sentiment. Too often, this disregards the long-term impact on the markets. It is easier for traders to sell first and ask questions later. That is what we are experiencing. The big question is at what level the selling factor has caused the uneasiness of the unknown. My eyes are on that 50-week EMA, so I’ll be watching closely how this week ends before I head out to South by Southwest in Austin, Texas, next week to get a first-hand look at developments in the tech market.
At the time of publication, Byrne had no positions in any securities mentioned.
