I wanted to do a quick update on one chart that caught my eye this week.
After the recent selloff in technology and all of the negative commentary surrounding AI-related stocks, the Nasdaq 100 may be sitting at a pretty important technical inflection point.
More specifically, QQQ may be forming what technicians call a cup-and-handle pattern.
I am not saying the pattern has to work.
That is never how I look at technical analysis.
But the setup is interesting enough that I think it is worth watching.
What Is a Cup and Handle?
A cup and handle is generally considered a bullish continuation pattern.
The pattern was popularized by William O’Neil in How to Make Money in Stocks.
The basic structure is fairly simple.
A market advances, pulls back, and then gradually recovers, creating the rounded portion of the pattern that looks like a cup.
Once price gets back near the prior high, it typically goes through another smaller consolidation.
That becomes the handle.
If price eventually breaks above that resistance area, technicians will often measure the depth of the cup and add that amount to the breakout level to estimate a potential price target.
It does not mean the market is guaranteed to reach that target.
It simply gives you an objective way to define the setup.
Why QQQ Caught My Attention
When I looked at the Nasdaq 100 over a longer time frame, the resemblance was pretty noticeable.
You have a large rounded move that could potentially represent the cup.
Then you have the recent consolidation and selloff that could be forming the handle.
What makes the setup particularly interesting is where we are right now.
We are sitting very close to the area where the pattern either begins to confirm itself or starts to fail.
That makes this a pretty important inflection point.
What Would the Upside Target Be?
The way I measure a cup-and-handle pattern is fairly straightforward.
You take the approximate distance from the top of the cup to the bottom of the cup.
In this case, I am roughly looking at 750 at the top and 660 near the bottom.
That gives you approximately a 90-point range.
If QQQ can break out decisively, adding that 90 points to the breakout area gives you a potential measured-move target somewhere around 840.
That would obviously be a fairly significant move from current levels.
Again, it is not a prediction.
It is simply what the chart pattern would imply if it confirms.
There Is Another Side to the Setup
The reason I think the chart is especially interesting is because there is a pretty clear downside scenario as well.
Technical patterns work both ways.
If QQQ cannot hold the recent support area and what looked like a breakout turns into a failed breakout, that changes the picture considerably.
I am watching the area around 660 as important support.
Below that, there is another larger support area closer to 560.
If the upper support level fails decisively, I think you have to at least consider the possibility that the entire setup was a failed breakout rather than a bullish continuation pattern.
That would create a very different risk-reward picture.
Failed Moves Matter
One thing I talk about frequently is failed breakouts and failed breakdowns.
They can produce some of the fastest moves in markets.
If everyone sees the same bullish pattern and positions for a breakout, but the breakout fails, those investors may suddenly have to reverse their positions.
The opposite can happen after a failed breakdown.
That is one reason I do not simply look at a pattern and say, “This is bullish, therefore it has to go higher.”
The pattern gives me a framework.
Price still has to confirm it.
Sentiment Makes the Setup More Interesting
The other thing that makes this worth watching is sentiment.
Commentary surrounding technology, AI stocks, semiconductors, and some of the former market leaders has become considerably more negative following the recent selloff.
That does not automatically mean those stocks are about to rally.
But markets have a tendency to make things difficult for the greatest number of people.
If everyone has suddenly become bearish on technology at the same time that the Nasdaq is sitting near a potential breakout point, I think it is worth paying attention.
The chart matters more to me than the commentary.
What I’m Watching From Here
For me, the setup is fairly straightforward.
If QQQ can hold support, complete the handle, and break above the prior highs, then the potential cup-and-handle pattern becomes much more interesting.
At that point, the measured move would suggest considerably more upside.
If support fails instead, I would stop treating the setup as a bullish cup and handle and start paying much more attention to the downside levels.
There is no reason to predict which one has to happen.
That is one of the things I like about technical analysis.
You identify the important levels ahead of time and then let the market tell you which scenario is actually occurring.
Right now, I think QQQ is sitting at one of those levels.
We will see which way it breaks.
Matt Williams, CFP®
JTM Williams Capital Management
The ETFs, indexes, securities, and strategies discussed are for illustrative and educational purposes only and do not constitute a recommendation to buy or sell any security.
