What are the current opportunities in market reversals?

In this article, Mish Schneider, director of trading research and education at MarketGauge.com, looks at the recent movements of the Nasdaq 100 and the Invesco QQQ ETF, considering the opportunities it might present in the future

­­­On Tuesday, the Nasdaq 100 [QQQ] broke its 50-day moving average (DMA) before the end of day rally brought it back over. This created a reversal pattern we like to call an expansion day.

An expansion day is formed when a large range day crosses over a major moving average — in this case the 50-DMA.

The pattern shows that large amount of buying was able to push the price over a key resistance/support level with ease.

When looking at the chart of the QQQ you can see that not only did the price clear over its 50-DMA, but it was also able to fill the gap left by Tuesday’s opening price.

Filling the gap is another important level to break as it shows short-term resistance has failed. With that said, the Nasdaq 100 has a heavy focus on tech stocks, which have seen huge runups in price.

The last time this index had any correction under the 50-DMA was about four months ago, in late November.

Though today created a reversal pattern, a visit under the 50-DMA could be healthy for the tech-heavy index.

Small corrections can help the market move higher as it supports a refresh of buyers before the next move up.

A recent example of this can be seen in the transportation sector [IYT], which recently broke under its 50-DMA only to make a comeback to new all-time highs.

Additionally, these types of reversals offer a dip buying opportunity as the price clears back over its major moving average.

Overall, Tuesday’s expansion day pattern shows that buyers still have strength and, with the US Federal Reserve’s support, are looking for the trend to continue higher.

This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.