QQQ Cup and Handle (How to Trade the QQQ in Q4)

QQQ Cup and Handle (How to Trade the QQQ in Q4)

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In the stock market, a cup and handle pattern is treated as a bullish trading set-up that can mean more upside is ahead. When we use the phrase “set-up,” we’re referring to a situation where, if the pattern confirms, the probability of a break-out is increased. The word probability here is important: Technical analysis isn’t magic. It isn’t a crystal ball. It isn’t a guarantee. In trading, there are no guarantees. There’s only probability — and technical analysis can give traders insight, increasing their probability. When we say, “if the pattern confirms,” we’re talking in this case about a weekly close above the “handle” of this cup and handle. A break below that handle would negate this technical set-up entirely.

That’s the caveat — now we can get into the meat of the trade. The QQQ Nasdaq ETF has been setting up for this cup and handle formation since the final days of 2021. Personally, to me, this looks extremely promising — but you have to approach it the right way. Here’s how to trade the QQQ cup and handle formation.

How to Trade the QQQ Cup and Handle

There are three things you’d need to do in order to trade this QQQ cup and handle set-up.

  1. Wait for the Handle to Break

Since this is a weekly chart we’re looking at, a confirmation of this pattern means a weekly close above the “handle” that we’ve charted above. Currently, the QQQ is sitting directly on the upper band of that handle channel. Here’s a closer look at that handle:

That means, this week, if the QQQ closes at, for instance, $380, that would be a completion of the pattern, and a technical signal that a trade might use to “get long” this name. To be even more convincing, we would want to see high volume on that candle and the candles to follow. Note that recently the volume of the QQQ is currently somewhat depressed. Seeing the QQQ set a new short-term high in volume on the same candle that it breaks above the handle would be extra bullish. It isn’t as firm as the signals above, but as a point of reference, weekly volume above the local peaks set on March 20th and June 12th (>~323 million) coinciding with a break above the handle would be an example of this (indicated below with the green line).

That’s how you would know the pattern is confirming — however, there are two more things you’d want to do in order to trade this pattern in the QQQ effectively.

  1. Use the Right Time Frame

For share-traders, this isn’t as relevant. However, for options traders, you’re looking at a weekly chart that extends from the last few days of 2021 into present day. That’s about 1.75 years of weekly candles. Suffice it to say, you do not want to try and trade this potential break out with daily or even weekly-expiring options. Doing so would expose you to unnecessary risk in the form of market fluctuations that, on a weekly chart like this look minor, but for a daily option, would be catastrophic. Instead, at a minimum, you would want to opt for an option closer to the 30-day expiring timeframe — with the intention of rolling to a later expiration (and likely a higher strike) upon reaching a certain profitability percentage. Realistically, a breakout in this long-term chart would indicate the potential for more than 30 days of movement — but 30 days is a reasonable timeframe to use that balances theta risk, gamma exposure, delta, and dollar-risk, while still allowing you to roll. A longer timeframe, like a 60-day-to-expiration option, would also be acceptable and even a potentially safer choice. For a reference on how theta impacts options, use this chart below:

option greeks

There’s one more very important thing you’d want to do if you were going to trade this signal. 

  1. Set a Stop-Out Level

A stop-out level is essentially a level at which the stock in question must revert back to in order for your trade thesis to be rendered invalid. This doesn’t necessarily mean you have to actually “set” the stop level in your brokerage — a lot of traders don’t like to do this because of how rigid it is. Instead, you might consider setting a chart alert inside your brokerage so that you are alerted the moment QQQ breaks below your “line in the sand” — allowing you to make the decision yourself of exactly where the best exit is, and if the situation is salvageable. The common place for a stop-out level in a cup and handle formation is below the bottom line of the handle, but no lower than half of the depth of the cup. However, ideally, the trade should never have to reach this point during the duration of your trade. As an example, here’s roughly where that “line in the sand” stop-out zone might be:

The Bottom Line: Cup and Handle in the QQQ

Cup and handle formations like this don’t come around every day. This is a long-time coming for an ETF that has historically traded higher time after time. With the help of several tailwinds, including the Fed ending its rate-hike cycle, and the many benefits of AI to the tech sector, this trade could come to life after a long period of doldrums. Notably, two years ago on September 17th 2021, the QQQ closed at $373.83 — less than a dollar away from where it trades today. That’s a sign of how far we haven’t come over the past two years. However, in trading, consolidation after a long run-up is often considered a good thing. When that consolidation leads into a massive, bullish technical set-up like this cup and handle pattern in the QQQ, it becomes a must-watch event.

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