Tech Just Made a Major Trend Reversal

This chart shows that there was a major trend reversal in the relative performance between Nasdaq stocks (QQQ) and S&P 500 stocks (SPY).

In May, the QQQ/SPY performance ratio reached an extremely significant bottom. It reached the 55-month EMA (orange line), which is also the base of the monthly EMA exp ribbon. Chartists use this base to detect significant bottoms. The fact that QQQ/SPY cleanly landed on this base and has since then formed a trend line upward means that there is a very high probability that tech and growth companies are about to outperform companies in the S&P 500. In fact, we are already seeing quite a few IPO companies breaking out.

The trend line (white line) is about to force the QQQ/SPY relative performance ratio above its displaced EMA (yellow line). A displaced moving average (DMA) is a moving average that has been adjusted forward or back in time in an attempt to better forecast trends. Chartists often use the crossover of the displaced EMA as confirmation of a trend reversal. Once QQQ/SPY crosses above this line and it becomes support, the trend reversal will be confirmed on the daily chart.

Further confirming this trend reversal is the short derivative, SQQQ. Market participants buy SQQQ either to short QQQ or to hedge against losses while also holding QQQ. Since May, there has been less and less volume in SQQQ. This shows that fewer and fewer market participants are opening new short positions against tech and growth. Meanwhile, the price of SQQQ continued to move to the upside. The price of SQQQ is now being resisted by the 55-week EMA. This fact coupled with the price-volume divergence is sending an ominous signal for those who are still short in tech. Since SQQQ is historically over-extended to the upside, the slightest of bullish signals for tech and growth stocks could result in a major short squeeze. (See chart below)

It is therefore quite dangerous right now to open new short positions against growth and tech companies. IPO and Biotech stocks have already broken out to the upside. Commodities, including energy, are breaking down, which in turn shows that the inputs of inflation are cooling down. The charts show that the Fed will not be as aggressive as many analysts expect. Charts never lie, analysts do.

Unless a black swan event occurs, it is quite likely that the Nasdaq 100 has put in a significant market bottom.

Comment:

Some people have pointed out that my trend line could be just a base to a bear flag. My counterpoint is that this trend line is just a simple continuation of the long-term trend: