Why QQQ Bulls May Want to Stay Hopeful

Subscribers to Chart of the Week received this commentary on Sunday, August 24.

This week’s Big Tech rout drove the broader market to substantial losses throughout the week. Leading the push lower were (seemingly impenetrable) large cap tech titans Palantir Technologies (PLTR) and Nvidia (NVDA). The pair suffered an (overdue) bout of profit taking, which resulted in respective losses of 9.4% and 3.5% on Aug. 19.

The Nasdaq-100 Index (NDX) shuttered 1.4% on the same day; testing, breaching, and ultimately reclaiming the psychologically significant round number 23,000 level. The AI bubble finally looked ready to pop, with comments of a "fear bubble" from OpenAI’s CEO Sam Altman adding even more pressure. However, no area of tech suffered more than exchange-traded fund (ETF) Invesco QQQ Trust (QQQ), which after Thursday, was mired in a six-day losing streak -- its longest slump in over three years.

Chart technicians and bubble prophets can point to the trendline connecting QQQ’s November, February, and August highs and say this was a long-time coming. Bulls, on the other hand, can point to recent support moving in at its ascending 50-day moving average. With both support and resistance facing off, we turned to quantitative data to untangle the QQQ mess.

Schaeffer’s Quantitative Analyst Rocky White pulled data from the past 10 times in which the Invesco QQQ Trust saw six consecutive losses. The study goes back to December 2012 and measures the average one-week, two-week, one-month, and three-month returns. The most notable takeaway is that three months after every one of the 11 six-day losing streaks, the QQQ was in the black, averaging an 8.1% gain. The best performances came in August 2015 and February 2016, when the ETF surged 16.4% and 11.4%, respectively, three months out.

However, the short-term prognosis is less optimistic, with the first three post-signal dates resulting in gains of 2.7% or less. In simpler terms, instant gratification is unlikely for tech traders on the QQQ, but with some patience, history suggests the reward will be sweeter. From Thursday’s QQQ close of $563.28, an 8.13% pop would put the equity just above $609 -- well into fresh record high territory.

A dovish Fed and a tech bounce is driving major indexes -- and the QQQ -- higher Friday. The resurgence of upbeat sentiment is to be expected, though it wasn’t enough to offset QQQ’s weekly deficit. Inflation data looming in the next four weeks – combined with the short-term caution signal revealed above -- could cause more choppy waters for overbought tech. However, should Big Tech prove resilient, quantitative data shows the ETF could see a substantial boost by the three-month marker.