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Believe the Nasdaq’s Bounce? Not So Fast.

The Nasdaq is in bear-market territory but is holding up better than some of its peers. Don't be so fast to trust it.

Thursday was a sobering session in the stock market - even if you didn’t want to be sober by the time the market closed.

U.S. equities fell close to 10% on the day, the worst decline since the 1987 crash. The move came after weeks of stock-market stress and pain put U.S. indexes in a bear market.

On Friday, equities were rebounding. The Nasdaq and S&P 500 were up more than 4% at one point but are now closer to flat.

While a 4% rally would usually put the bulls in a good mood, it’s little more than a dead-cat bounce at this point, given that the PowerShares QQQ ETF  (QQQ)  and SPDR S&P 500 ETF  (SPY)  fell more than 13% in the two days prior to Friday’s session.

The Volatility Index undefined remains elevated, close to 70, with this latest surge sending it to the highest level since the financial crisis. All this does is equate to little faith in the current rebound.

Let’s look at the charts.

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Trading the Nasdaq

Daily chart of the QQQ ETF. 

Daily chart of the QQQ ETF. 

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Interestingly, markets ignored the coronavirus outbreak in China, as equities continued to bubble up to record highs less than a month ago. Think about that, as the QQQ ETF hit a high of $237.47 on February 19. As of the most recent close, it was down more than 26%.

The velocity of this move has been stunning. The Dow Jones and Russell 2000 are already in bear-market territory, too, (and in record time), but they’re also at or below the 2018 lows. That’s not the case for the QQQ.

In fact, the QQQ still hasn’t taken out its low from June, where it bottomed at $169.27. If the ETF cannot hold the $180 level and takes out the current 2020 low at $177.32, then the June low is in play.

If the selling pressure persists, it puts the potential for a precipitous fall on the table, with many investors likely turning their attention to the fourth-quarter low from 2018. 

That stands near $143.50 and if hit, would be a decline of nearly 40%. We're certainly not there yet, so don't panic. But it's important to know what levels could be in play should support continue to give way. 

For investors to flush the QQQ that low, it will need to crack into some of the ETF’s larger holdings. That starts with Apple  (AAPL)  and Microsoft  (MSFT) , each of which makes up about 11% of the total holdings. With Amazon's  (AMZN)  8.5% weighting, 30% of the QQQ is made up of these three stocks. 

They will either help the ETF weather the storm or be its demise if investors begin throwing in the towel.

On a more optimistic note, say the recent low holds. In that case, we need to see the QQQ reclaim Thursday’s high, up at $190.78. Above that and $195 is possible, with the 200-day moving average near $200 in play above that.