QQQ – At an Inflection Point

Coming off a week that was action-packed with the Federal Reserve two-day meeting which had them raise short term interest rates by 25bp, and key economic data that showed the markets just how out of control inflation has really become, the market may have really gotten ahead of itself. Overall, there are still many headwinds that will continue to cause volatility across major markets, but how these events play out will settle the direction for the NASDAQ 100 ($QQQ). 

1. The situation with the big unknown in Ukraine which is affecting the entire commodity complex. Most may be focused on oil, but agricultural products and precious metals also are playing a volatile role. 

2. Higher inflation. This has a lot to do with higher commodity prices, but it also has a lot to do with the economy being flush with cash. Raising short term interest rates by 25bp won’t do anything to tame inflation, but neither will 1-2%. Fed Chair Powell did indicate seven rate hikes going forward, but the level of those rate hikes will be key if inflation continues to run higher.

3. Supply chain issues. Companies are getting better at dealing with shortages in the supply chain for various goods, but the situation continues to be a challenge. With higher oil prices, it affects a lot of the industrial supply chain as oil is a major byproduct for goods in the consumer staples, discretionary, industrial, transportation, technology and of course energy sectors. 

One barrel of crude oil generates 19.4 gallons of gasoline. The rest generates over 6,000 products in various industries some of which are found on the below table. 

4. Recession risks. This one is the most interesting. Employers are posting a great deal of jobs in the marketplace which gives the firsthand indication that jobs are plentiful, but looking at job boards over the past few months, they don’t seem to be hiring much as the jobs continue to remain there. On the other hand, many employees across industries have been given good pay raises. What will remain a key point to observe is how consumers choose to spend in the next six months. Are they planning on doing more with less spending as shelves in big box retailers are continuing to look empty, or are they looking to pay more for the same goods?

Taking a look at the charts of $QQQ on various time frames:

The daily chart shows a strong bounce off of the double bottom and right at a strong resistance level of the 38.2% retracements and the 50p SMA. This price action can be looked at in terms of the longer term ABCD pattern to the downside if price does not break past the higher 61.8% retracement level. 

The weekly chart shows that price bounced off of a key retracement at the 38.2% level but left a gap which most likely will get filled. In most cases when price bounces off of a retracement of 50% or less the probability is very high that price goes back into the direction it once came from – in this case higher. 

The monthly chart gives a very good long-term perspective of how the $QQQ performs. Every time it hits the 20p SMA in the past 10 years it has bounced higher from there. Currently, we’re right at the 20p SMA, with a hammer bottoming candle hence we’ll wait for the next two weeks to play out to see where the candle finally closes. 

Last week  positive developments were made off a double bottom post the Feds interest rate hike, and the next several weeks will be a key determinant of where the price action leads too as we head into quarter end and into earnings season while monitoring the consumer spending and inflation numbers, among other macro data along the way.