Chart watchers may be getting anxious as the Nasdaq, along with the benchmark-related exchange traded fund, form a potential trend-reversing pattern.
Ahead of the corporate earnings season angst, traders are watching a negative technical formation building in the Nasdaq Composite Index, reports Patti Domm for CNBC.
The index is forming a bearish head-and-shoulder pattern, which could signal a potential reversal in the bull market. A head-and-shoulder formation reflects a market where it initially rises to a peak and declines; then, the price rises above its former peak and shows another decline; lastly, the price strengthens but not as high as the second peak and dips once more. The first and second peaks are seen as the shoulder with the middle high peak as the head.
The Nasdaq Composite Index is currently showing a potential head-and-shoulder formation with the March 2 and April 10 peaks as its shoulders and March 20 high as the head.
Since its most recent peak on April 10, the PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, has dipped 0.6%.
“If the pattern follows, it will go down and test the starting point on the first shoulder,” said Justin Walters, co-founder of Bespoke. “There’s no real guidance into how much it will be fall.”
However, the Nasdaq Composite would have to decline to about 4,850 to fully form its head-and-shoulder pattern. The index was hovering around 4,977 Wednesday.
For those who remain skeptical and want to hedge against a potential pullback in the Nasdaq, there are a number of inverse or bearish ETF options that capitalize on market turns. The ProShares Short QQQ ETF (NYSEArca: PSQ) takes the inverse or -100% daily performance of the Nasdaq-100 Index. [Correction Prep With These Inverse ETFs]
The more aggressive trader can also juice returns through leveraged plays. For instance, the ProShares UltraShort QQQ ETF (NYSEArca: QID) tracks the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ) reflects the triple inverse or -300% of the Nasdaq-100. However, potential traders should be aware that these ETFs show higher volatility and come with greater risks. [Inverse ETFs to Hedge a Pullback in the Nasdaq]
Nasdaq Composite Index
For more information on the Nasdaq, visit our Nasdaq category.
Max Chen contributed to this article.