Market to See an inevitable 2nd leg Higher toward $630 After Today’s Pull-Back Ends

Today’s pull-back is a small blip in the overall rebound/segment back up to $630. Looking at the chart, the QQQ rebound simply went too far for scenario #1 that we outlined. Let me explain exactly what that means and the ramifications of different moves. Today’s daily briefing goes into momentum and the types of things we clearly see in correction. The analysis below builds on each other and teaches a key lesson on how the market moves at every time scale (1 min, 5 min, hourly, daily etc).

First, with the QQQ now down about 6-points from yesterday’s highest point, if this selling continued and last week’s selling resumed, it’s very unlikely that it would represent a 2nd leg down in a correction or something. That’s because the rebound/retracement went way way way too far. The QQQ retraced 67% or 2/3rds of the entire 7-day sell-off in just 2-days. That’s now how it usually goes. IN a bearish environment, it should go the exact opposite way. The days down should be much larger than the days up. Meaning, the impact from selling should be larger than the impact from buying on the NvN rule. It took 7-days for hte QQQ to go from $637 to $598 and only 1.5 days to go from $598 up to $624. That’s the problem.

Now can we see? Have we seen it? Yes. We have. We’ve seen this lead into a monster sell-off. And that is precisely what we’d need to see for selling momentum to continue. If we hae an equal 2nd leg down, it will look like an inevitable reversal. For example, if the QQQ falls 37 points from $624 down to $587, that’s a mere 9-point lower low. It will look to incremental on the chart and indicate that the sell-off is ending. No different Thant how the 2022 bear market ended on the 25% bear market rally in June – August 2022. While the QQQ had another leg down between September and December, that leg down was doomed to fail. That’s where we are here.

The only way to undo what happened between Friday afternoon and Monday’s trading is for the QQQ to fall at least 43 points stirahgt down non-stop from $624 down to $580. We’d need to go straight down to $580. That would re-estabablish momentum and undue the rebound up to $624. Basically, we needed the reboudn to stop at $618. Because it didn’t, now we have to add the 6-point shortfall to the next leg lower for correction-level momentum to be re-established.

The reason this rarely happens is because the rebound going too far means the market is simply not ready to correct just yet. The very fat that the QQQ rebounded from $598 all the way up to $624 IS THE very reason that we probably don’t have the momentum to see the QQQ make up the short-fall.

This is something we see ALL THE TIME. We have literally 1000’s of data points on this. I know it might be confusing, but this is very real and we see it on a near daily basis. These momentum rules are natural rules derived from daily observations. If you see any stock top on even the minute chart, drop 10 points, rebound 5-points, drop another 10-points, then we have a trend. The momentum on of those rebounds goes further than 5-points, you have a slow shift in the change of momentum. Now in order for that down trend to continue the stock must make up the shortfall and reach its naturally intended target as if the rebounded didn’t go too far. But the very fact that the rebound went too far tells you that the bear side of the grade is dying out. The selling momentum is dying out. It can only be re-ignited if the next leg down is larger than the previous legs. But the very fact that the rebound went as far as it did is in itself evidence that we’re not going to see that larger sell-off. Let’s take a look at what that means by analyzing the chart below.

Let me just say, better than us posting this analysis in something like investing basics, you’re learning it live as it’s happening. These principle apply to every time scale from the 1 min chart to the daily /weekly chart. The first chart below shows what should have happened if last week’s sell-off was the start of a correction:

So to review, here’s what we have going on here.

Leg 1: QQQ DROPPED from $637.01 to $598.67 or -$38.34 points down $637.01)
Rebound 1: SHOULD REBOUND to only $617.84 or + $19.17 (50% retracement of Leg 1)
Leg 2: QQQ SHOULD DROP to $579.50 (-38.34 points down from $617.84). Total correction 9.02%

Now this is the textbook way correction should play out. But the reality is they all pretty much deviate from this textbook scenario.   They just don’t deviate by much and when they do violate momentum principles, they make it up.  What’s more, when they do deviate, it’s usually a BEARISH deviation on a downtrend or a bullish deviation on an uptrend. 

Meaning, instead of rebounding to the 50% retracement, maybe we get a rebound to the 30% retracement line.  That’s bearish.  Which is fine because it’s a bearish trend.  Momentum rules aren’t really being violated.

For example, let’s look at the April correction.   What happened there?  The QQQ topped at $538.77 and fell in a straight line down to $495.06. That’s a $43.71 straight drop down – not much different than the $39 point drop we just saw.   The difference is that the QQQ then rebounded from $495.06 up to $511.11 or only $16.05.  The 50% retracement line was +$21.86 or $516.92.  So it fell a full 5.81 short of the 50% retracement line.   

Sometimes you do get a bullish deviation in a downtrend as we’re seeing now, but the market rectifies that by generally making it up on the next leg lower to re-establish the momentum.   

But in most cases, when you have an actual correction playing out, this is typically how it geos and the bottom of a correction becomes predictable by measuring the shift in momentum.  Shift in momentum to the buy side is one way, capitulation is the other.  Both are highly predictable indicators for a bottom.  

As the present case is concerned, what you need to know is that the rebound we’ve seen off of Friday’s lows has gone too far.  So when you see a pull-back in today’s session, the gut reaction shouldn’t be, maybe we’re seeing a continuation of the correction.  No.  That’s not the right reaction here.  Instead, what today’s session sort of indicates is that we’re seeing a pause or pull-back ahead of an inevitable second leg higher.  All of our targets we outlined in yesterday’s session haven’t changed in light of today’s pull-back.   Yesterday’s rebound up to $624 already killed any chance of a correction happening off of the sell-off from $637 down to $598.  

Instead, what we have is the double-top scenario we’ve discussed and that scenario immediate came into play the very minute the QQQ decided to drop below $610 and fall to $598.  That’s 12-point dropped sort of doomed the rally.   Something we’ve seen countless times on all time scales.   We see this type of thing happen all the time on the 1-minute, 5-minute and hourly chart. IN fact, this entire rally from April to November has been seen repeatedly on the hourly chart.  You’ll get a rally with normal small pull-back and then a larger off-trend pull-back near the end of the run, another attempt to continue the run that ends with a double-top or head & shoudles or three push.  But when observing it on the smaller time scale, you already get the sense that the run is over just by noting the off-trend pull-back. 

That’s because the amount of momentum needed to return to the highs is way outside the scope of what we’ve seen at this point in the rally.  We haven’t seen any momentum that would take the QQQ to high enough levels to re-establish the up trend.  

Add to that the fact that the QQQ just breached the $600 level to reach as high as the mid-century mark. Add all of that into the analysis + the duration record + the high return rate and we have a strong case for a double-top here.   So here’s how today’s pull-back fits within that outlook: 

Now it’s important to point out that while the QQQ could resume the sell-off from last week, the likely impact is that we’ll end up with a double-bottom or incremental new low, because as we’ve pointed out above, the QQQ won’t have enough momentum to push it to the requisite level required to establish a full downtrend.  Here’s what would happen if today’s selling continued: 

To be perfectly honest with you, if we saw this play out, it would really muddy the waters for us.  This would actually be a bad outcome.  Because if the QQQ were to fall to $587 a share in a second leg lower, that would mark a 7.85% correction.  Enough to make it on the correction table.  If the QQQ then rebounded from there, there’s no guarantee we see another correction like we saw in the Dec – Feb time-frame.  Remember, there we had the same thing happen.  The QQQ dropped from $538 to $499 a share.  We launched Stark on that drop and went 50% long because we were uncertain as to whether that counts as THE correction after the Aug – Jan 111-day rally ended or whether the market had something more in store for us.   That drop from $538 to $499 represented a 7.24% correction right?   

We’d get the same muddied outcome and given the fact that we’d have this incremental new lows issue at play, the correction would almost certainly end up being a smaller 7-8% correction.  So we don’t’ really want to see the QQQ turn lower until it has a shot at the previous highs.   

For us, the best overall outcome is the most predictable outcome.  And here that means beginning a new segment, rallying to $637 and layering into September puts.  During the next segment pull-back, we will layer out as the QQQ becomes oversold and re-enter on rebounds.  Just as we did here.  That action will allow us to continuously decrease our cost-basis – as we have – thereby ensuing that we end up with an optimal LOW cost-basis near the peak of the entire rally.  It will ensure that we capitalize on the next correction.  

By the way, when we started this post, the QQQ was down $6+ at $617 and now it has recovered to -2. So trending in the right direction.