A correction in financial markets is conventionally defined as a decline of at least 10% from an all-time high. At its lows of the day, the NASDAQ (COMPQX) found itself down 9.3% from the all-time high set almost two months ago. The depths of this decline also marked an important breach: the NASDAQ traded below its 200-day moving average (DMA) (the blue line below) for the first time since April, 2020. The algorithms probably got itchy at these levels: buying a correction is a classic technical move. However, the tech-laden index was already over-stretched below its lower Bollinger Band (BB). So front-running the 10% threshold at quasi-oversold levels was likely a temptation no trading algorithm could resist. The end result was a furious rally that took the NASDAQ from 2.7% down at the intraday low to a flat close.
I love this chart because it combines several important technical elements in pure poetry. I drew a downward sloping arrow connecting the two points of the correction to highlight the move. The list in the chart highlights the lines of poetry for the NASDAQ. The trifecta of milestones created compelling buying catalysts for speculators willing to bet on a rebound. Still, the flat close leaves the NASDAQ perched precariously at support formed by the intraday and closing lows from December. Follow-through buying would create bullish conditions. Resumption of selling and a close below the 200DMA would generate bearish conditions.
The Trade
Coming into the week, I already held Invesco QQQ Trust (QQQ) calls from the long side of a weekly calendar call spread. Accordingly, I am looking for the bullish upside scenario. However, given the heavy trading, I assume the near-term upside is limited to overhead resistance from the 20DMA (the dotted line above). A close below the 200DMA would put the October low in play as support.
Be careful out there!
Full disclosure: long QQQ calls