Bearish Indictor from 20 ROC on 20 EMA combined with Volume

Short

Invesco QQQ Trust, Series 1 (NASDAQ:QQQ)

NASDAQ:QQQ Invesco QQQ Trust, Series 1

In this idea i am looking at two main indicators. First the 20 day rate of change (ROC-20) of the 20 day EMA (EMA-20) of the price signal, and the daily volume signal.

The 20 ROC on the EMA (ROC-EMA 20/20) is the highest it has been since the early stages of the pandemic (April-July 2020). I chose the 20 day ROC because in choosing 20 days I will more effectively be able to compare the most recent rise in EMA ($300-$342 in approx. 20 trading days), to the general ROC-EMA 20 trend over the past year. Choosing a longer ROC effectively produces a moving average of the instantaneous rate of change. In more mathematical terms, this is the slope of a secant line from the current price to the point N-periods prior. Another way to look at this is to think of the instantaneous ROC as being a weighted component of N-periods ROC.

Given that the recent rise has been as rapid as it has been, and that it is as pronounced as it was during the early stages of the pandemic, the next question should be, is this rise supported by a proportional degree of market participation? Looking at the volume on the TVOLQ it can be seen that the volume has been falling off sharply in recent trading weeks. This represents a bearish divergence, since the price signal (rapid increase) is coupled with a sharp decline in market participation (volume).

In addition, last weeks stellar earnings reports were met with a decline in the subsequent price action for the majority of stocks who reported last week and the week prior. This is especially concerning considering that ~90% of stocks beat earnings estimates according to EarningsWhispers.com. Furthermore, according to an article published by Bloomberg this weekend, the subsequent price action to last weeks stellar earnings was in stark contrast to the historical pattern. Historically, stellar earning reports lead to an overall increase in prices after the reports are released. However, equity prices last week have actually fallen since the earnings reports. Tesla is a good example of this. Tesla reported record earnings, record car shipments, and positive forward guidance, yet their stock fell as low as $670 from $740 in the days following their earnings report.

I am bearish on the QQQ and the market in general. If you are a bull, I advise considerable caution in the coming weeks. If you are fortunate enough to experience gains in the coming weeks, then go and buy a lottery ticket, because that kind of luck will eventually run out, and you do not waste this opportunity, I'm sure.

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