Last week’s NASDAQ plunge caught many off guard, but not the MTG Tribe. Here’s how we saw it coming and what savvy traders should watch for next.
Traders, let’s talk about what just happened in the market. Last week, we sounded the alarm: the NASDAQ was showing signs of weakness, and we cautioned that sometimes, the best trade is no trade at all. Fast forward to today, and boy, did that advice pay off.
The QQQ not only failed to reclaim its 20-day EMA but also took a nosedive, culminating in a jaw-dropping 3.5% drop in a single day. While many traders watched their portfolios bleed red, our MTG Tribe members were sitting pretty, their capital intact and ready for the next opportunity. How did they pull it off? Stick around, because we’re about to show you.
I’m Deron Wagner, founder of Morpheus Trading Group, and today I’m joined by our head stock analyst, Rick Pedicelli. With over half a century of combined market experience between us, we’re going to break down what just happened to QQQ and the NASDAQ, and more importantly, how to spot when it might be safe to dip your toes back in the water.
The Anatomy of a Market Breakdown:
Let’s rewind to our last analysis. We highlighted several red flags that had our spidey senses tingling:
- QQQ’s Break of the 20-day EMA: This wasn’t just any old dip. After an extended upward move, QQQ sliced through its 20-day exponential moving average like a hot knife through butter. In a strong bull market, we expect to see price action respecting this level. When it doesn’t, it’s time to pay attention.
- RSI Divergence: While QQQ was making higher highs, its Relative Strength Index (RSI) was painting a different picture, showing lower highs. This divergence is often a precursor to a trend change, and boy, did it deliver this time.
- Sector-Wide Weakness: It wasn’t just QQQ. We saw similar patterns in XLK (Technology Select Sector SPDR Fund) and the semiconductor index. When an entire sector starts showing cracks, it’s rarely a good sign.
The Domino Effect:
As Rick pointed out, after breaking the 20-day EMA, QQQ gave us a classic head-fake. It bounced for a couple of days, luring in the unwary, before resuming its downward trajectory. The price action stalled at resistance from the declining 8 and 20-day EMAs – a textbook example of previous support turning into resistance.
Then came the knockout punch. QQQ gapped lower, smashing through the critical support at 474 and the 50-day EMA in one fell swoop. This is the kind of move that separates the pros from the amateurs. While moving averages often provide support, when the market decides it’s ready for a real selloff, it can blow through these levels like they’re not even there.
The Bigger Picture:
With the NASDAQ now below both its 20 and 50-day EMAs, we’re in correction territory. The 50-day EMA is now our line in the sand for bullish action. Above it, there’s hope. Below it, caution is the name of the game.
Rick highlighted potential support in the 448 to 440 area for QQQ. But remember, in trading, we never assume. We take it one day at a time, always ready to adapt to what the market gives us.
What’s Next? The Follow-Through Day Concept:
Now, here’s where it gets interesting. With the NASDAQ down more than 8% from its highs, we’re on the lookout for a follow-through day. This is a crucial concept that’s served us well for over two decades.
A follow-through day is a rally of 1.5% or more on day four or later of a new rally attempt. It’s not foolproof, but it’s a reliable indicator that institutional money is starting to flow back into the market.
Here’s how to play it:
- Wait for the price action to stop making lower lows on the daily chart.
- Look for a strong up day (1.5% or more) on higher volume, starting from day four of the rally attempt.
- If we get this follow-through day, that’s our signal to start carefully adding long exposure.
Remember, every market bottom is different. We might see failed rally attempts before the real move higher begins. That’s why we start small, add exposure if our initial positions work out, and quickly cut losses if they don’t.
Key Takeaways:
- Always respect technical breakdowns, especially when accompanied by divergences and sector-wide weakness.
- Sometimes, the best trade is no trade. Our model portfolio has been mostly in cash since July 17th, avoiding significant losses.
- Watch for a follow-through day as a potential signal to start re-entering the market.
- Be fluid. If the market tells you to add exposure, do so. If it says to back off, listen.
- Managing your equity curve is crucial. Preserve gains and limit losses, but avoid completely selling out of strong trends too early.
Remember, trading isn’t about predicting the future. It’s about managing risk and being prepared for multiple scenarios. By understanding these key levels and concepts, you’re equipping yourself to navigate whatever the market throws at us next.
Stay sharp, stay disciplined, and as always, trade what you see, not what you think.
For deeper understanding, WATCH the video below:
Elevate your trading journey with Morpheus Trading and Rick Pedicelli’s wealth of experience.
If you found these insights valuable, hit that like button and subscribe for more in-depth analyses.
For precise entry and exit points on top swing trade setups, visit MorpheusTrading.com and join our MTG Tribe.
In trading, the learning never stops. Keep pushing, keep growing, and always trade with confidence.
And always remember, trade what you see, not what you think!
Sign up for The Wagner Daily PRO today and take the next step towards trading success.
Join the exclusive MTG tribe in uncovering potential profit opportunities with a proven swing trading strategy.
Thanks for joining us on this journey, and until next time, happy trading!
Stay Connected:
Stay Informed:
