Monday Market Milestones
RLT Newsletter
The triangles on both SPY and QQQ broke lower on Friday with large gap downs. QQQ closed down 1.5% while SPY finished lower by 1%. QQQ wicked down into the $686 support level but still did not fill the gap below at $682 or touch the anchored VWAP sitting near $684.
From here, I see two primary scenarios playing out in the short term.
QQQ Daily Chart
Bullish Scenario
The first scenario is a quick flush lower early this week that fills the gap at $682, ramps up fear, and gets traders piling into puts and short positions before reversing higher. A move into that pocket of liquidity followed by a sharp bounce would be a classic bear trap.
QQQ has been grinding lower for nearly two months and would be roughly 8% off its highs if it fills that gap. That type of pullback could easily produce a relief rally back toward $700, with $712 becoming a realistic upside target if buyers step in.
Bearish Scenario
The second scenario is a decisive close below the $682 gap fill and support level without an immediate reclaim. I want to emphasize that I am talking about the short-term picture here.
I still believe the 100-day SMA should provide meaningful support for QQQ, which sits only about 4% below Friday’s close. The warning signal would be a daily close below $682 that is not reclaimed either intraday or during the following trading session. If that occurs, I would expect additional downside, to the 100-day SMA or as low as the 200-day SMA, before a more durable low forms.
QQQ Daily Chart
Medium-Term Outlook
Over the medium term, I believe any pullback into the longer-term moving averages on QQQ will present an excellent opportunity to increase long exposure, especially for those of us who spent much of June and July reducing positions and raising cash.
Simply looking at the price action on SPY and DIA, it is difficult for me to imagine that we are finished moving lower. Semiconductors have also broken below the necklines of a large head-and-shoulders patterns, suggesting there should still be more downside before they find lasting support.
SPY Daily Chart
If you trade the 10 EMA strategy that I teach at Real Life Trading, you know that IWM triggered a bearish entry on Friday by printing its third consecutive bullish candle that closed beneath the declining 10 EMA. If Friday’s low is broken, I could easily see IWM pulling back another 3-5%.
IWM Daily Chart
If we see a sustained break below Friday’s lows across many of the charts I am watching, I believe sellers will remain in control and we should finally get the type of pullback that creates attractive buying opportunities.
The Prosperity Portfolio is now fully in cash after a tremendous first half of the year, so I welcome the opportunity to buy QQQ and other leading stocks at lower prices. Patience has been rewarded so far, and now we wait to see whether the market gives us the entries we’ve been preparing for.
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