Nasdaq 100 and NQ! (E-mini Nasdaq Futures) are at make or break levels.
A bearish flag pattern has formed, which is visible on intraday charts such as the 130-minute chart shown above. A bearish flag, according to famed technical analyst Martin Pring, is a parallel trading range accompanied by a trend (uptrend or downtrend). In a downtrend, he says, a flag is usually formed with a slight upward bias.
When price violates the lower part of the flag, the sharp slide often resumes and volume may pick up. But the downward breakout need not be explosive.
Note the triangle pattern on the daily chart as well, which also confirms the tightening consolidation seen in both the Nasdaq (cash index) and the futures. These consolidations imply a price breakout is imminent, a consolidation being a sort of gradually tightening battle between buyers and sellers.
However, the bearish flag and the downtrend line both suggest that the breakout could be to the downside.
Lastly, given how oversold NQ! / Nasdaq is on a daily chart, it seems that this breakout to the downside could lead to an excellent rally off meaningful tradable lows. Try a Fibonacci retracement of the move lower from all-time highs, and look for a reasonable target for the bounce around the .50 retracement or the .618 retracement.
This is for educational purposes only. Please do you own research for your own trading and manage risk properly (position sizing, soft stop losses, and profit targets).
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It looks like the short-then-long thesis was partially incorrect. The rally starting Jan. 28 has been the powerful rally I had been expecting. But I anticipated another retest of Jan. 24 lows first based on Elliott wave structure b/c it looked like a Wave 4 was forming off Jan. 24 lows, which implied a 5th wave down.
I guess the 5th Wave is still possible, but it is unlikely at this point. Wave 4 cannot retrace any portion of Wave 1, so if NQ rallies above 15,152 (and it's already hit 15,149 this evening), then the 5-wave structure is invalid. In addition, the bearish flag did not perform as expected. I wonder what the percentage success rate is for bearish flags -- does anyone know? Very little in this market has been going as expected!
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It's possible a bearish flag still exists. Note also the downtrend line (short-term) and the whipsaw that occurred as price broke through the downtrend then reversed back below it.
Because traders should be flexible, I am willing to redraw a bearish flag as new price information prints, showing new boundaries for it. But at some point, though, a pattern should not be continually adjusted to fit price data when the pattern is clearly not working as expected. But the price action the last couple of days has been nothing but indecisive, and has remained in an apparent flag pattern. So for now, I'm sticking with it until proven wrong.
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While price remains within the bearish flag, it will trend higher in the short term. Given indices are short-term positive, I should note that IF the bear flag patter is valid, price will continue to rise within the flag until the pattern is negated or confirmed. In other words, the flag shown is a rising channel, so until a downward breakout occurs, price should find support at the rising trendline (connecting the lows) and find resistance at the return line (upper channel line).
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And the triangle pattern has confirmed an upward breakout in the short term. The markets have been really mixed lately, and I've noticed high level pro traders being quite uncertain as the market chopped the last few days. But one wise trader I know commented that Goldman Sachs wrote in a recent note that certain restrictions are being lifted on stock purchases / buybacks at US public companies, so now that earnings are almost finished for most S&P 500 companies, this extra buying power should add fuel to the short-term rally we're seeing
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So price is decisively breaking out of the bearish flag pattern today to the downside, confirming the pattern. Given the powerful upward price action over the past week, it's been challenging to think that the bear flag was valid. But sometimes, it pays to be patient with technical analysis, giving the patterns / ideas enough time to work out!
Nice catch and chart Theta-burn. Whats your assessment of the Friday 28th PA? Its still within the parallel channel and likely hits upper end around 14800 which in itself is resistance. Also, I dont see any MA's coming in the way until about 15K. I guess we hit 15K next week then. What are your thoughts?
Do you burn NQ theta as well? If so NDX or NQ or both?
SquishTrade
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@digicool, Thanks for your comment and thoughts. Much appreciated. This has been a very tough week for bulls and bears. Tough for the bulls because it's very much unclear whether a reversal will occur and when. Price has spiraled down so fast in just 17 trading sessions, and it's easy to get annihilated by just another volatile day down or up. Tough for the bears b/c the market is extended to the downside, so minor bounce or even mean reversion leaves bears little room. And the recent move is likely near the end of a 5-wave Elliott structure with ambiguity about whether the 5th wave is completed and a corrective bounce is underway, or whether the 4th wave is underway and a 5th wave could soon break the low of Jan. 24. Not an expert on Elliott wave, but just thinking along those lines now. I do think you're right about the MAs not being resistance until about 15K. 15K seems like a sensible level for a corrective retracement move too. It's near the top of the parallel channel, and the upper edge of the channel rises, so each day that passes, while price still consolidates within the channel, causes the upper line of the channel to rise, increasing the possibility of price reaching 14,800-15,000 on a bounce. Friday's price action (is this what you meant by PA?) came as a surprise to me. Up 3.22% on the Nasdaq was a stronger bounce than I anticipated. It broke the downward trendline going back to Jan 12, so that's a point in favor of the bulls. But the price channel on the bear flag still could act as resistance, right? Hitting 14,800 makes sense. But with how volatile price has been, I wouldn't be surprised to see a downward breakout and a push somewhat past Jan. 24 lows. What's your best guess on the coming week?
digicool
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@Burning-Theta, they ride the momo wave into trapping longs. I can see resistance in the 600-800 - the area from where the big drop happened.
SquishTrade
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@digicool, While futures contracts don't have theta decay, it's not impossible to burn theta on NQ with options on futures. So i guess technically one can burn theta on futures options--I have not traded those, and probably won't. I just do NDX options, well QQQ options usually. Do you trade options on futures?
digicool
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@Burning-Theta, yeah, I burn theta on NQ options. Short NQ strangles - serves as theta gainer and vega drainer. Ofcourse lastweeks vol pump was nerve wracking as the margin req rose upto +50%.
SquishTrade
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@digicool, interesting! I've not met anyone yet who does futures options, though I know that occurs. Short strangles? That sounds super risky, you must be very good at this. I've never wanted to remove the long put and call options that serve as protection in an iron condor. (Conceptually, I think of a short strangle as essentially the same as an iron condor except without the long strikes as protection . . .) Just curious, why do you do those as short strangles rather than adding in the long options on the outside (higher and lower) for protection?
digicool
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@Burning-Theta, sure long options provide the ultimate protection but takes away some theta. Yea these get hard to manage on rising vol env like the one we have now. Its great when the vol shrinks.
Do you burn NQ theta as well? If so NDX or NQ or both?