Last month we wrote a piece entitled, “The QQQ Flash Crash From Friday That No One Is Talking About”. The Friday was June 9th and almost a month has passed. What have we learned in the last month?
On June 9th, QQQ volume was 104,765,166 shares. The following Monday June 12th, QQQ volume was 101,009,505 shares. Monday was also a day that saw weakness and the QQQ drop -0.54%. Since those days, volume has remained heavy. June 29th saw a drop of -1.74% on the QQQ and volume was 87,153,362 shares.
There have been a total of seven trading days since June 9th where QQQ trading was greater than 50 million shares. Only two of those days, June 28th and 30th, saw positive closes. The conclusion is obvious. On weak days sellers are emerging in force.
From the June 8th close, the day before the QQQ Flash Crash, the QQQ is lower by -4.05%. From the June 9th close, the QQQ is lower by -1.59%. These statistics show us that a great deal of pain has yet to be felt from investors in the QQQ. The pullback has yet to hit 5% or even 10% which is normal corrective behavior in a bull market for the QQQ.
The last correction of more than -5% on a close over close basis was -8.10% that happened from April 18, 2016 through June 27, 2016. The QQQ almost corrected -5% on October 24, 2016 through November 4, 2016 with a drop of -4.95%.
So we are due and the action the last month has been a warning of a possible correction of at least -5% or a possible pullback up to -10%. What makes us confident of this possibility besides the “shot across the bow” on June 9th?
First, when tracking the NASDAQ 100, we find that 25% of the stocks have a strong technical rank as defined by Erlanger Research, Inc. The Erlanger Technical Rank has ten ranks from 10% to 100% in 10% increments. So 25% of the names in the NASDAQ 100, are ranked between 60% and 100%. Meanwhile, 40% are ranked between 30% and 10%. If we included 40%, then the number expands to 52%.
Next, the retracement tool found in Erlanger Chart Room shows us that from the March low to the June peak, the NASDAQ 100 has only tested its 38.2% (5673.66) and 50% (5606.32) retracements. It is reasonable to assume that the 61.8% (5538.97) retracement could be hit in this cycle. If this level is hit, then it could bring the corrective action to 5.88%. Last, a 100% retracement would take the NASDAQ 100 back to the March low at 5320.96. Such a move would be a correction of -9.59%.
Third, the NASDAQ 100 has started to make a series of lower highs and lower lows on a daily chart since the peak on June 8th. This is also a classic warning sign. Failure to move above 5845.15 on the next move up and then a move below that last low at 5579.64 last Thursday, July 6th would validate the above data points.
For now, we remain cautious and will look at positioning of the NASDAQ 100 in early August or sooner if a sudden move begins to the upside or downside. Until then…
Geoff Garbacz is the co-founder and one of two principals in Quantitative Partners, Inc. (QPI). Geoff and his team at Quantitative Partners have over 36 years of experience on Wall Street. Prior to the formation of QPI in 1995, Geoff worked for The Robinson Humphrey Company from 1990 to 1995.