I have written many times in the past about rising wedges and their bearish implications. In this unbelievably strong bull market prior rising wedges, for the most part have failed to follow through. So, at the risk of crying wolf and giving up providing a potentially important message, I am going to present another rising wedge that has raised its ugly head. If you stop reading here I fully understand based upon past failed examples but the way Murphy’s law works is that one time you don’t pay attention turns out to be the real deal. So hear me out.
One of the strongest sectors of this 7 year bull market has been the strength of the Nasdaq 100, symbol QQQ. It’s an ETF that holds the top 100 technology stocks. So when this area of the market is telling us a story we should sit up and listen.
Let’s take a look at the daily chart below and see what it is telling us. The upper pane, price momentum, is providing a mixed signal as it is oscillating within the bullish zone but been negatively diverging with price since the start of the rising wedge. The bottom pane, volume, is telling us distribution is slowly occurring as the selling volume is stronger of late. Indicators and volume are helpful and should be used as confirmation only because in the end the only thing that matters is price which is represented in the middle, largest pane.
Analyzing the price action two important bearish elements should jump out at you. The first being we formed a rising wedge (blue lines) and price finally broke below it today. Secondly, we formed a double top at $111. Both of these patterns carry bearish implications. I have illustrated the chart with two horizontal red lines which represent very critical areas of support at ~$105 and ~$99.5 should the market want to fall further from here. Very interestingly and coincidentally the projected move from both of these bearish elements projects the same thing, is a correction to the $99-$100 area, or right at S2. When a confluence of evidence points to the same outcome, that provides additional validity and importance to that outcome.
The inner investor on my left shoulder is telling me that any correction forthcoming is just a consolidation in an ongoing uptrend so no action is necessary. Sit on your hands, be patient and ride the long term trend.. The inner trader on my right shoulder tells me this bull is tired and that if today’s hammer close does not act as a reversal, this is a place to take some profits, take some risk off the table and consider adding a hedge to protect my portfolio. So the question that needs to be answered is are we traders or investors?