Will PowerShares QQQ Trust Follow Apple's Path?

By ETFguide.com  MAR 07, 2013 4:52 PM

Apple's stock is approaching the 50% decline level from its 2012 peak. There were warning signs in the chart that could have helped you get out near the top. Some of the same warning signs are showing in the Nasdaq-100.

 


Remember in 2012 when the only thing anyone could talk about was Apple (NASDAQ:AAPL)? Remember when its price was approaching $700 and analysts were calling for $1100?

In 2012, everyone and their mother -- literally -- owned Apple stock. That, of course, was a problem; in hindsight, it was a very crowded trade. 

Currently, Apple’s price is in the low $400s and well below even any of the “expert” analysts’ low price targets (which last I checked was at $465). My guess is that it is only a matter of time before those experts continue to chase price lower, ratcheting down those targets back in line with reality. For more on analyst coverage (or lack thereof) of Apple, see my firm's recent article on Apple’s psychology here.

Shouting "Fire!" in a Crowded Theater

Even after its extreme decline, Apple still represents around 17% of the S&P Technology Sector (NYSEARCA:XLK) and 13% of the Nasdaq-100 (INDEXNASDAQ:NDX), down from its peak of around 20%. No doubt it still remains very important to the markets and many ETFs. Apple is a wonderful example of how price is the only true leading indicator and can be used to help you get out of the way before disaster strikes. Following price in Apple warned us of a trend change to down in October. 

In a research piece titled “Is Apple’s Stock in a Bubble?” written on October 5, 2012, we warned (along with the following technical analysis and chart), “Apple is in a decade long uptrend, but if price were to fall below $600, that would be a sign that the four-year uptrend in Apple has changed to negative.”

Using similar techniques should also help us get out of the way of another much larger pending disaster (discussed below).    



This breakdown occurred the next month in early November, and there has been no turning back as investors continue to head for the exits as Apple falls another 30% from that $600 price.

Similar Chart for the QQQ?

Looking at a zoomed-in chart of Apple, we can see a head-and-shoulders topping pattern that helped identify its top. The left shoulder was in April 2012, the head was last fall, and then the right shoulder was in the November 2012 rally that broke down at the turn of the year. Apple continues to sell off toward its head-and-shoulders target. 



There is hope for Apple holders, though, as its price may finally find some support in this $400 price range as buyers from 2011 step back in to support (shown in blue). 

For broader market holders, though, a similar topping pattern may also be forming on the Nasdaq large-cap index.

The Nasdaq-100 Is Reflecting Apple’s Chart

In 2012, headlines such as, “Is this the golden age of Apple?” and “It’s not too late to get into Apple” could be found everywhere. Today those same headlines are in abundance -- but this time, the focus is on the broader market instead of Apple. 

Basically these are the same as the Apple headlines above: “Is this the Golden Age of Corporate Profits?” and “It’s not too Late to Get in: Pro” are examples of some of the headlines I just came across when researching the Nasdaq Index (NASDAQ:QQEW)…wash, rinse, repeat.  Talk about déjà vu (and a warning sign)!

We recently provided the below chart along with commentary, key price levels, and trade setups, along with the warning, “A break of this level will also be a long-term short signal as it confirms the head-and-shoulders pattern. We will cross that bridge if/when it occurs.”

Not only is the media following the same script for the broader market that they did during Apple’s peak, but the charts are also showing similar topping patterns.



The potential head-and-shoulders pattern in PowerShares QQQ Trust  (NASDAQ:QQQ) is a big warning sign that the Nasdaq and other equity markets such as the S&P 500 (INDEXSP:.INX), Dow Industrials (INDEXDJX:.DJI), and Russell 2000 (INDEXRUSSELL:RUT) could be setting up to follow Apple’s lead to the downside. 

The good news is that there are specific price levels that will tell us if the pattern is indeed playing out on the PowerShares QQQ Trust, just as it did in Apple. We will also know this likely long before most “expert” analysts catch on to the trend change and initiate more negative outlooks.

Editor's note: This story by Chad Karnes originally appeared on ETFguide.com.

To read more from ETFguide, see:

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No positions in stocks mentioned.