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Building a scenario for near-term bullishness in the QQQ

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The week after Memorial Day weekend has been historically bullish the past 18 years, with 14 bullish weeks versus 4 bearish. Today in the market monitor, I've been discussing some things I'm looking at near-term that could be hinting that technology stocks, specifically the NASDAQ-100 Trust (AMEX:QQQ) $31.17 has some potential to trade bullish next week.

In past commentary, I've talked about how a market will move like a snake or even an inchworm. The "head" portion usually leads an advance, while the "tail" trails the move.

I like to try and "classify" various sectors/indexes almost as I would a snake. Those that are the "weakest" represent the "tail" and those that are the "strongest" represent the "head."

Using past market history (no guarantee of future success) as a near-term guide, a trader will begin looking for any signs of "confirmation" to a pending move (up or down) based on technicals that are currently in play.

In recent months, it has been my observation that the Biotech Index (BTK.X) and GSTI Software Index (GSO.X) have been two of the "weaker" sectors in technology and both have large representation in the NASDAQ-100 Trust (AMEX:QQQ). On the other end of the spectrum, I've classified the Semiconductor Index (SOX.X) as a stronger sector of technology, thus I classify it near the "head" of the snake or inchworm analogy.

For an inchworm to move forward (a market advance) I believe, based on observation, that the "tail" section must show some type of stability or anchoring in order for the inchworm (the market) to get hold and actually advance.

Today, I'm seeing some "anchoring" from the GSO.X and the BTK.X and this perhaps "fits" with the thought that market history might be able to repeat.

While the markets have been rather mixed to lower after about an hour after the open, I've been monitoring the BTK.X, GSO.X and SOX.X rather closely. Trying to get a feel for the more heavily weighted technology groups that can impact the NASDAQ-100 Trust.

The "tail section" or the GSO.X 123.78 -0.22% and BTK.X 400 - 0.15% have been seesawing above and below the unchanged levels today and have held above yesterday's lows. To me, this is a near-term attempt to "anchor" the tail of the inchworm.

Conversely, the "head" or the SOX.X 500 -3.64% is showing further weakness. For the QQQ to show bullishness, I would eventually want to see this decline abate as the "head" stop turning lower as if to look at what is pulling at the tail of the snake. However, this "turn back" is perhaps how an inchworm actually moves. Well, sort of anyway. Here's what I'm trying to get across.

The market my inchworm chart

For a QQQ advance, a trader needs to see the "tail" section of the inchworm/market at least try and anchor itself if it is to move forward. One can envision how the QQQ just became "stretched out" recently after a nice move higher from the $28.70 level. Then on May 20th, the SOX weren't able to extend their leadership and the software and biotech stocks started slipping back and losing some of their bullishness. Then on May 21st, all three slipped lower, but the SOX outpaced the declines in the last couple of sessions (more profit taking, shorting, etc.). But yesterday and even today, we're seeing the "tail" try and anchor itself, while the "head" has the SOX down 3%.

In essence, the "inchworm" is compressing further, but the tail is trying to grab hold.

Now, I speak rather bullish right no, only due to market history perhaps being bullish next week, but hopefully the above commentary will help traders/investors better understand my "snake/inchworm" talk from time to time.

The "market" or the "inchworm/snake" is made up of many sectors, with semiconductors, biotechs and software being just three. However, for the QQQ trader, these three sectors comprise the bulk of the QQQ. Their technical aspects and impact on the QQQ should be understood and constantly monitor.

As profiled in today's market monitor, I like the QQQ as bullish below the $31.75 level, targeting the $33.25 level into next week with a stop just below at $29.95. If the "bottom of the inchworm" falls out and slips lower, I want to protect myself.

Jeff Bailey
Senior Market Technician
Option Investor

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