Don't Ignore This Chart!

QQQ: Breakdown, Mean-Reversion Opportunity or Both?


The Nasdaq 100 ETF (QQQ) broke down with a sharp decline the last five days and this pushed RSI(5) below 30 for a short-term oversold reading. The breakdown is bearish, but it has also created a short-term mean-reversion opportunity. 

I first introduced a mean-reversion trading system using RSI in June 2016. This system evolved over the next few months as I turned to the Chandelier Exit for exit signals. The system trades SPY, IJR, QQQ and MDY using RSI(5) for entry signals and Chandelier (22,1) for exit signals. This article is only available to StockCharts members

The chart above shows QQQ with the last four trades. Three were winners and the last one was a loser. The system buys when RSI(5) moves above 30, which means it must first be below 30 and oversold. 

The system sells when QQQ closes below the Chandelier Exit (22,1). Most entries occur when QQQ is already below the Chandelier Exit so this means the ETF must first move above the Chandelier Exit before an exit is possible. 

The system has worked quite well over the last two years so perhaps it is time for a lull. But you never know...

Plan Your Trade and Trade Your Plan.

- Arthur Hill, CMT

Senior Technical Analyst,

Book: Define the Trend and Trade the Trend
Twitter: Follow @ArthurHill

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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