The market hasn't been easy the last couple years but November is shaping up differently. Using the Nasdaq 100 via QQQ stock as a way to invest directly in market strength, the current rally is showing some differences from the fake outs of the last couple of months. It begs the questions: Is this time for real and will it last?
Rally In QQQ Stock Turns Bearish
After a strong rally from May to July, the stock market returned to a bearish bent. The megacap tech stocks held up relatively well. The Invesco QQQ Trust offers a way to play tech strength by matching the Nasdaq 100 index. Those are the top 100 nonfinancial stocks that trade on the Nasdaq exchange. But contrast the relative strength of QQQ stock with the dismal performance of the small-cap Russell 2000 index. Most stocks looked like the Russell 2000, which actually undercut the lows of October 2022.
Narrowness has plagued the market the entire year and still hasn't gotten quite as robust as a normal full-throated rally.
But there are reasons for optimism. One of the notable features of the November setup in QQQ stock is that it had a three-waves down pattern immediately precede it.
Sometimes It Has To Get Worse Before It Gets Better
IBD founder Bill O'Neil likened the three-waves down pattern to advice from legendary UCLA basketball coach John Wooden. After faking one way a few times you get the opponent used to covering that side. Then you go ahead and do the opposite.
That's exactly what the market did. QQQ stock had a leg down from its July top to August low. A follow-through day on Aug. 29 fit all the criteria (1). The problem was that few stocks participated and QQQ stock never gained traction. We put a market position on that day for SwingTrader and exited quickly when it didn't hold the 50-day line (2). QQQ stock eventually made its second leg down.
A similar thing happened on Oct. 6 with another follow-through day (3). Again it couldn't make progress or hold the 50-day line and so we quickly exited our market-based position (4). That started the third leg down for QQQ stock. It was hard to find optimism among bears at that point with war breaking out between Israel and Hamas, recession fears and inflation still potentially requiring more tightening by the Fed.
The Next Rally Can Always Be Just Four Days Away
After losing so much ground at the end of October, it was easy to lose hope. QQQ stock was nearly at its 200-day line at its lows. But you always have to remember that as bad as things get, a follow-through day is always possible in just four days. Looking at the three waves down and oversold conditions, we actually went with an early buy on SwingTrader putting QQQ stock on right off the bottom (5). But the poor close had us cautious and we took off a portion just in case it didn't work.
But so far this rally for QQQ stock is looking different. The follow-through day came powerfully on Nov. 1 as QQQ stock punched back above its 5- and 10-day lines (6). A subsequent follow-through day immediately followed that put QQQ stock above its 21-day line (7). This was a position we had been in before. Things started looking good but then the traction didn't come and QQQ stock didn't maintain itself above the 50-day line.
This time was different. QQQ stock blew past the 50-day line and, more importantly it stayed there. Over the next week it made further progress and ended with a 2.25% gain Nov. 10 (8). It was a positive expectation breaker following a distribution day the day before.
It got even better. QQQ stock gapped up 2.15% on another subsequent follow-through day on Nov. 14 (9). Notably, the Russell 2000 made an even bigger 5.4% gain on the day as more stocks started to participate in the rally.
After such a strong rally, a pause should not only be expected but welcomed as a healthy digestion of the gains off the bottom. And that seems to be with the tight action the last three days. Based on the action of QQQ stock, it's a good time to use the weekend to find leading stocks that are setting up for another leg higher.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
