As a trader or investor, the weekly chart is a great tool to get a big picture of any market or instrument. It helps to eliminate price fluctuations caused by fundamental releases and news, giving us a better perspective on where we stand in the price cycle. Let’s consider the weekly chart for the QQQ to illustrate this point as we have several volume price analysis signals that would have alerted us to the type of price action we could expect in the following week.

The first point to note about this chart is that following the rally that began with the volume anomaly of a narrow spread down candle on high volume in October 2023 and confirmed with a break above both the volume point of control at $368 and the resistance at $380 was steady with volume generally above average (except for November & December which is what we would expect given they are holiday months). This rally paused in February this year when QQQ achieved its first ATH of the year of $446 after which the ETF entered a phase of consolidation that lasted until 15th April when markets reversed sharply, spooked by a spike in inflation.

However, the reversal candle, although accompanied by above-average volume was still anomalous given the range of the candle. It also triggered the volatility indicator which displays when the price action is outside the ATR. This almost always results in the price action retracing into the spread of the candle, which is exactly what happened here. In addition, the reversal candle also bounced on the anchored VWAP (yellow line) giving us confidence that QQQ was likely to move higher.

The subsequent’s week up candle was accompanied by good volume as was last week’s which also reflected the ebb and flow of sentiment from a clutch of releases. As a reminder, it was a shaky start to the week with the CB Consumer Confidence data coming in much worse than expected before Jerome Powell reassured the market with a dovish press conference. Last week closed out with the NFP numbers coming in lower than expected as did the Non-Manufacturing ISM.

New traders often wonder why poor economic data can drive a market higher rather than lower and vice-versa. In this instance, the fall in the number of jobs created signals a weakening economy (as did the ISM given the number came in at 49.4 against the market’s expectation of 52. For this release, any number above 50 indicates an economy in expansion while below the economy is contracting. Under these circumstances, the FED will be forced to cut interest rates sooner rather than later to avoid a recession.

There is also another aspect to economic releases in that the data is lagged with some more so than others. Therefore, the current economic picture as painted by the labour market may be worse. If so, why do markets continue higher? There are several reasons. One reason is that markets are forward-looking. Lower interest rates decrease borrowing costs, which results in a pick-up in consumer spending. It’s also important to remember that consumer spending accounts for almost 68% of US GDP. Mortgage rates will also fall, leading to a pick-up in the housing market. Additionally, we’re in earnings season which, so far, has surprised to the upside. 77% of S&P500 companies have reported a positive EPS (earnings per share) surprise.

For QQQ, heavily skewed towards tech & the top 7 stocks making up over 40% of the total weight of the ETF, any under or overperformance by these key stocks will disproportionately move QQQ in either direction. The 7 stocks I am referring to here are: Microsoft, Apple, Nvidia, Amazon, Meta, Broadcom & Google (2).

Since starting this analysis, QQQ is moving higher in the pre-market, as we can see on the 5 min chart, bouncing off the volume point of control at $435.50 and intending to regain the March ATH of $449.34.

With little in the way of fundamental releases today, we can expect the market’s focus to be on earnings, two voting FED speakers Williams & Barkin who are both considered ‘doves’ and unless either one deviates from their known position or spills the beans on interest rates cuts the market will take their comments in its stride. Moreover, with the FED’s ‘quiet’ period at an end, it may be a good idea to take note of other FED members due to speak this week – at least 6 more are slated to speak. We also have two T-bill auctions (3 & 6 months) today and here traders and investors will be focused on the take-up and yield.

In this type of trading environment markets with few market-moving releases (this is next week when we have the CPI) price action may be sluggish unless one of the FED speakers says something unexpected or there is a surprise in the bond market.

Have a great trading week.

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