Volatility Contraction in QQQ could Foreshadow an Expansion

The weekly high-low range for the Nasdaq 100 ETF (QQQ) was the narrowest of the year this past week and the ETF is battling triangle resistance. A narrowing range shows indecision and a volatility contraction. Even though this is just one weekly bar, QQQ is at a moment of truth. Will we see a triangle breakout and continuation higher or a failure at resistance and extended correction?

Let’s first look at the narrow range using High-Low Range Percent, which is part of the TrendInvestorPro Indicator Edge plugin for StockCharts ACP. On this weekly chart, High-Low Range Percent is set as follows: smoothing periods = 1 (not smoothed), signal periods = 1 (no signal line) and reference = 2% (horizontal line).

As a percentage of the close, the high-low range is at 1.68% and this is the narrowest range since the third week of January. Trading turned real quiet this week and QQQ could be preparing for a move. However, this is not a stand alone indicator and this one week volatility contraction should be put in context. First, note that QQQ hit a new high in early September and remains well above the rising 40-week SMA. Now let’s check the daily chart for a directional bias.

After hitting a new high in September and advancing over 70%, QQQ formed a triangle consolidation and digested this monster gain. Notice that I am using a close-only chart to filter out some of the noise. QQQ is attempting to breakout of this triangle and signal a continuation higher. In fact, the cup is currently half full and would remain so as long as the green support zone holds. A close below the November 10th close would put QQQ back into the triangle and back in consolidation mode. Chop, chop, chop.

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