Unprecedented Extension
RLT Newsletter
I hope everyone survived Tuesday’s bear market. All three and a half hours of it. Things got a little dicey there for a minute, but I think most of us made it out the other side intact.
In all seriousness, Tuesday’s gap down was one of the cleaner short setups I have seen in a while from a day-trading perspective. It was a textbook gap-and-go lower that opened beneath the prior day’s bullish candle following one of the steepest and most aggressive rallies in market history. I shorted MU and SOXX as day trades and kept the RLT Swing Trade chat updated with my thoughts throughout the session.
Around 1:00 PM, SPY put in a clean double bottom and has been grinding higher ever since. When that double bottom confirmed, I posted that Tuesday’s move lower was likely a bear trap and that the market would probably push back into new all-time highs first before any larger correction plays out. The idea was simple: trap the bears then the bulls. So far, that is exactly what is happening.
It was just too easy and too clean for Tuesday’s gap down to mark the high. There are too many buyers out there desperate to get a piece of this bull market for stocks to roll over several percent in a neat and orderly fashion. No key levels were broken either, so there was no real technical reason to get aggressively bearish on a larger timeframe based on that gap down alone.
SPY Daily Chart
26 Days and Counting
It has now been 26 consecutive trading days since QQQ last touched its 10-EMA.
In more than 25 years of QQQ trading history, through the dot-com bubble, the 2008 recovery, the 2020 COVID V-shape, and the 2023 AI melt-up, this is the first time it has ever gone 26 straight trading days without touching the 10-EMA. This is not just an overbought rally anymore. This is a literally unprecedented momentum event in the entire history of the Nasdaq 100 ETF.
What is also worth paying attention to is how these extended streaks have historically resolved. When QQQ has gone 20 or more trading days without touching the 10-EMA in the past, the eventual retest rarely produced a clean bounce off it. More often than not, price sliced right through the 10-EMA rather than holding it. Once price gets this stretched above its moving averages, the 10-EMA usually cannot absorb the selling on the first retest. Here is what the comparable episodes looked like:
March 2019: QQQ went 21 days without touching the 10-EMA, then dropped 11% once it finally tagged it.
March 2017: QQQ went 22 days without touching the 10-EMA. Instead of a sharp selloff, price chopped sideways for 31 days beneath both the 10 and 20-EMA in a slow, grinding time-based correction.
November 2015: QQQ went 21 days without touching the 10-EMA. When it finally did, price sliced straight through it and fell all the way into the 50-EMA before bottoming out, correcting roughly 17% in total.
November 2014: QQQ went 22 days without touching the 10-EMA. The retest resulted in about a 6% drop into prior all-time highs and the 100-day SMA before the market found its footing again.
May 2013: QQQ went 21 days without touching the 20-EMA, failed to hold it, and corrected roughly 8% into the 100-day SMA before eventually recovering.
November 2010: QQQ went 21 days without touching the 10-EMA, sliced through it on the retest, nearly tagged the 50-EMA, and corrected about 6% before resuming higher.
The common thread across all of these examples is that in extremely extended moves far away from the 10-EMA, it becomes less likely that price holds on the first retest.
QQQ Daily Chart
Where Things Stand Right Now
I am expecting QQQ to find resistance somewhere around its 200% Fibonacci extension, which is essentially where it closed on Wednesday. SPY, meanwhile, is pushing directly into the large Fibonacci confluence zone I covered in the previous newsletter.
That said, given how relentlessly strong this market has been, I still think we probably see a bit more upside before this move runs out of gas. Fibonacci levels are areas of interest, not magical brick walls that stop price to the penny. Nothing in technical analysis works like that. A push toward $750 on SPY still feels like a reasonable possibility before we see any kind of meaningful correction.
For now I am watching closely and staying patient. I would rather wait for a key support level to break or for a gap-down that actually follows through to the downside before getting on the short side.
Check out the video below where I review every major instance in history where QQQ became extremely extended from its 10-EMA and what happened after those momentum runs finally cooled off.
Things continue to climb, just seems a bit surreal to be honest.