QQQ and the Technology SPDR are holding up and near new highs, but there are still some serious pockets of underperformance within the tech sector and even within the top stocks. Today’s commentary will look at QQQ breadth, the big seven and QQQ’s little brother, QQQJ. We will analyze charts for the lagging tech-related ETFs and a few that are still holding up. Overall, we are still in a bull market and SPY is near a new high, but weakness within tech could provide a headwind going forward.
The Magnificent Seven of QQQ and SPY
The Nasdaq 100 ETF (QQQ) has a wedge breakout working, but Nasdaq 100 breadth has been underwhelming since late November. QQQ is driven by the Magnificent Seven as I will call them. By the way, I will go with the original from 1960, which featured Yul Brynner, Steve McQueen, Charles Bronson, James Coburn and Eli Wallach. The remake was not too bad, but there is nothing like the original (except the theme song).
These seven stocks include AAPL (11%), MSFT (10%), AMZN (7.8%), GOOGL (7.8%), TSLA (4.5%), FB (3.8%) and NVDA (3.7%). Together these seven account for 48.6% of the ETF. Such a high concentration means that breadth indicators are less effective in defining the price trend and signals for QQQ.
These seven stocks are also big drivers for SPY. Note that Apple (7%), MSFT (6.2%), GOOGL (4.2%), AMZN (3.7%), TSLA (2.4%), FB (2%) and NVDA (1.9%) account for around 27.4%. The Technology SPDR (XLK) is 29% of SPY and includes AAPL, MSFT and NVDA. The Communication Services SPDR (XLC) is 10% of SPY and includes GOOGL and FB. The Consumer Discretionary SPDR (XLY) is 12.7% of SPY and includes AMZN and TSLA.
The CandleGlance charts below show SPY, QQQ and the magnificent seven. First, notice that SPY hit a new high and exceeded its mid December high. Second, note that QQQ exceeded its mid December high, but did not record a new high (slight non-confirmation). Elsewhere, MSFT, GOOGL and NVDA hit new highs in November, but did not hit new highs in December and closed below their 50-day SMAs this week. AMZN did not even bounce with the market in late December. Thus, there are signs of weakness even among the magnificent seven.
Keep an eye on the mid December highs. Stocks and ETFs that did not exceed their mid December highs are not keeping pace and lagging (QQQJ, SKYY, FINX, FDN, IPAY, BOTZ, XRT, QCLN, ARKK). Stocks and ETFs that broke above these highs are leading (SPY, RSP, XLF, XLB, KRE, KIE, IFRA, XLE, XOP, COPX, CARZ)
Measuring Participation Surges within QQQ
Breadth indicators tell us what is happening under the surface and reflect performance for the average stock. Yes, there are a few “average” stocks in QQQ. Sometimes weakness under the surface (breadth) can extend to the leaders, sometimes it does not and sometimes there is a long delay. The bottom line: breadth indicators are just like any other indicator in that they are secondary to price action. Signals derived from the price chart take precedence. A bullish signal on the price chart is reinforced when there is confirmation from breadth.
The chart below shows QQQ with Advance-Decline Percent and the 10-day EMA of AD%. The green/red arrows show when AD% exceeds +80% or -80%. The price chart shows five bullish continuation patterns since September 2020. The November, March, and December breakouts occurred without a one-day breadth thrust (> +80%). The May and October breakouts occurred with one day breadth thrusts.
My concern with QQQ is that we saw dips below -80% in late November and early December. These showed broad participation on the downside. In addition, we have yet to see a counter surge above +80%. Thus, we have yet to see broad upside participation. QQQ is currently holding its breakout on the price chart, but Advance-Decline Percent was negative four of the last six days.
QQQ Holds Breakout
The next chart shows candlesticks for QQQ and the breakout is holding, which means it has yet to be proven otherwise. QQQ fell back over the last six days and a small flag could be forming. This pattern is too short-term for my taste. The green line at 390 marks my line in the sand for the bigger breakout. A strong breakout should hold and a close below 390 would show cold feet. This would not be outright bearish because the long-term trend is still up. It is just the level to watch for signs that weakness within Technology is expanding.
QQQJ is Still Lagging
The next chart shows the Nasdaq 100 Next Gen ETF (QQQJ) with a new high in November and then a test of the summer lows in December. QQQJ became oversold on November 30th and December 6th as the Momentum Composite dipped to -3 or lower. The ETF attempted to bounce the last few weeks, but this bounce is not getting much traction. SPY hit a new high in late December and QQQ exceeded its mid December high, but QQQJ did not exceed its mid December high and is lagging.
Long-term, the ETF remains in a choppy uptrend, but it is below its February 2021 high and has nothing to show for the last 11 months. This is hardly a consistent and persistent uptrend. The ETF could be forming a triangle over the last 4-5 weeks and this would be a short-term bearish continuation pattern. The ETF needs to break above 34 to negate this bearish setup and regain its bullish momentum.
Several Tech-Related ETFs Lagging
The next chart shows the Cloud Computing ETF (SKYY) with a 16% decline that broke the August-October lows and a small triangle consolidation. Again, SKYY showed above-average weakness by breaking the August-October low and again shows weakness by not clearing the mid December high. The triangle looks like a short-term consolidation after a sharp decline, which makes it a bearish continuation pattern. As with QQQJ, SKYY needs to clear the mid December high to negate this bearish setup and get the bulls back on track.
The next chart shows the Software ETF (IGV) with similar characteristics as SKYY.
XLK, Semis and Networking Holding Up
The Technology SPDR (XLK), Semiconductor ETF (SOXX), Next Gen Connectivity ETF (FIVG), Robotics Automation ETF (ROBO) and Networking ETF (IGN) are holding up so far and leading within the tech sector. The first chart shows XLK with a breakout in mid October, a surge into mid November and a zigzag higher the last seven weeks. The trend is up, but I do not see a setup on this chart right now. Note that there were three setups in 2021 (patterns with blue lines). We cannot expect a setup every week or even every month. Three to four per year translates into one every three to four months.
The next chart shows the Semiconductor ETF (SOXX) with a 24% surge and rather large flag. The ETF is making a breakout attempt as it battles the upper line of the flag. This is not what I would call a robust setup for three reasons. First, several tech-related ETFs are lagging since November. Second, this setup does not feature a short-term oversold condition or pullback. Third, the flag is rather large and the reward-to-risk ratio on a breakout is not good (support is around 510).
On the chart above, notice that SOXX provided three setups and signals in 2021. A robust setup is a pullback with an oversold condition and a tradable pattern. The first breakout in early April failed, but the breakouts in late May and mid October were successful. Again, we can expect three to four decent setups per year and may have to wait a few months for the next one.
The next charts show FIVG, IGN and ROBO.
The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.
The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.