Powershares QQQ Trust Could Hold The Key In An A-B-C Wave
Monday, April 27, 2009
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Last week, I wrote about a correction in the market that seemed well overdue. And after last Monday’s sharp sell-off, which was almost 290 points in the Dow, I thought that correction was underway.
Then with the indexes opening lower last Tuesday morning, it seemed flat-out inevitable that a correction had begun…
…For the first ten minutes. After that, they went right back up.
Most of the indexes moved sideways to higher for the rest of the week, though some did fail to take out the previous week’s highs, which were made back on Friday, April 17. With that said, they still spent enough time below those highs to make up a second or “B” wave pullback in what I foresee as a three or possibly even five-wave advance.
When the markets correct, it normally does so in a three-wave advance, or what Elliot Wave students call an A-B-C correction. On the other hand, if we see a five-wave advance, that could very well mean that the markets movements are bullish over the long-term instead of merely marking a longish bear market rally.
So which is it going to be?
Keep in mind that the Nasdaq 100, Russell 2000 and S&P 400 (mid-cap) indexes, were the ones that made new rally highs in Friday’s final hour of trading. While all of them are likely in their third or “C” wave, the stock indexes as a whole are largely subject to traders’ emotions.
And that’s exactly why I keep an eye on them, but only analyze stock index futures, which trade much more rationally. As for the cash indexes: think of them as less accurate and lagging composite indexes that merely have slightly different chart patterns.
Daily And Weekly Charts Just Don’t Jive
The daily and weekly charts are both out of sync and very complex, making them tougher to analyze. But let’s take a look at them all the same…
The Nasdaq 100 made its lows way back in November, while all the rest touched current bottoms in March. And since then, the Dow and S&P 500 went low enough to satisfy their daily and weekly charts.
But as for the smaller cap indexes and cash indexes such as the NYSE Composite and Wilshire 5000? At this point they quite simply haven’t gone low enough to convince me that we’ve seen a long-term bottom yet.
Since the March lows, the indexes have triggered daily buy signals. Then after last week’s pullback, they finally set up some minimum upside targets on the daily charts. Those would be:
- 892 for the S&P 500
- 8,200 for the Dow
- 1,383 for the Nasdaq 100
Set up like that, the indexes could easily trade above their minimum targets. However, the price action around those levels remains important. If the Nasdaq 100 and S&P 500 especially can generate weekly buy signals, that could override the longer-term chart patterns altogether.
Since we’re dealing with long-term charts, it naturally takes longer to generate signals. But since the process is complicated, let me try explaining the basics of how a weekly buy signal can be triggered…
In order to simply set one up the Nasdaq 100 would have to trade up to at least 1,390 and the S&P 500 to 906. If they reach or exceed those levels in any particular week, the high point of that week needs to be taken out once that week in complete.
If both those steps occur, a weekly signal could trigger in a few day’s time.
An Italian Interpretation
The Nasdaq 100 has outperformed the S&P 500 since last November. As you can see on the weekly spread chart below - which shows the point difference between both indexes - the Nasdaq 100 has steadily gained ground on the S&P 500 over the past five months.
Currently within 10 points of reaching the all-important 61.8% Fibonacci retracement level of the sell off that began last fall, if it has trouble getting above the 517 area, we could see the S&P 500 begin outperforming the Nasdaq 100, on a relative basis.
And since we’ve focused so much on the various indexes this Sector Watch, let’s take a look at the Powershares QQQ Trust (NASDAQ: QQQQ).
As you can see, QQQQ also made its lows in November, instead of March, and is already tracing out a “3 wave” move to the upside. It has a minimum target of $33.99, which is just .30 cents above Friday’s close.
The 40-week (200 day) moving average comes in around 34.35 and the swing high on November 4 was $34.01, so a number of potential resistance levels surrounded the $34 area.
The Long-Term Message Is Mixed, But Here’s What To Look For This Week
Based on the two charts in this article, the Nasdaq 100 and QQQQ could run into some selling this week. Looking at the Nasdaq 100 chart, it could even be in store for a 5-wave advance if it continues to move higher.
Or on the other hand, the other indexes may just be looking at a 3-wave advance. Even though the other indexes have pulled back long enough to generate minimum upside targets, they could still undergo a deeper pullback before they reach those levels.
Also, it’s important to understand that what I’m calling a potential 3-wave advance is based on my proprietary chart patterns, which don’t always coincide with an Elliot Wave count. So from an Elliot standpoint, most of these indexes could still be in the first wave.
As it stands now, I need to see more market data to get a better feel for the longer-term, but for this week, keep your eyes on the important resistance levels of 892 for the S&P 500 and the $34-$36 area in the QQQQ if this rally continues.
That’s it for this week,
Jim
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