QQQ is not here yet

It will likely take new lows in QQQ for new highs in VXN and for a new buy signal to emerge.

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There's a commonality between a three-year-old on a family road trip and traders and investors. Both groups want to know "Are We There Yet". Although neither three-year-olds nor shopkeepers tend to have much patience, at least the ultimate arrival time is known in advance on a family road trip. The ultimate low is only known after the fact in the stock market.

In my article several weeks ago, I discussed how option prices can help predict future stock prices, in this case a short-term top. It was an interpretation of Warren Buffett's philosophy of being afraid when others are greedy. Option prices are the embodiment of this notion. When rising, option prices tend to fall and vice versa.

This is evidenced in the VIX which tends to be inversely correlated with the S&P 500. The VXN is a similar measure for NASDAQ 100 stocks. Both the VIX and VXN are a measure of option prices over 30 days.

I had then expressed my opinion on how the recent lows in VXN portend a near-term top and impending pullback for the NASDAQ 100, or QQQ. That turned out to be the case, with QQQ dropping 10% in the past few weeks. Now the question is how prices will go down until QQQ finds support.

Once again, I'll turn to using option prices to give me an idea of ​​when the market's unease might become exaggerated. Just as VXN lows usually indicate a pullback, the spike towards the highs is usually a reliable indication that a short-term low might be in sight. The chart below shows the previous six times over the past year when VXN hit highs and then started falling

Each instance marked a significant short-term high in VXN and a significant short-term low in QQQ. VXN has flattened recently. It may take further significant lows in QQQ for the VXN top to explode higher towards the 40 area and a new buy signal.

The last four peaks of the VXN have all exceeded the 40 area. This would definitely be a level to consider to go from bearish to bullish on the QQQ. A retest of the major support level at $290 in the QQQ would represent a pullback of just over 10% from recent highs near $325. This would also roughly equate to the average decline of 11.32% for the last six sell signals. It is very unlikely that a drop to $290 will also push VXN higher. Likely need new stockings.

All told, QQQ still has a bit of a ways to go until he finds a foothold if the story holds. It is important to remember that using an implied volatility based VXN methodology is more of a market timing tool for traders. QQQ's ultimate low will depend more on traditional metrics such as valuations.

Back to the original question of "Are We We There Yet". The answer is no, not yet. If the past is any guide, however, option prices indicate that it looks like we're definitely getting closer.

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All the best!

Tim Bi...