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Which Stock Index Will Perform the Best in Q4? The Charts Give a Hint.

U.S. stocks are in the midst of a mild pullback. Will that pullback sharpen or will stocks snap back? Let's look at the charts.

The third quarter was a rocky one for the stock market. At the quarterly low, the four major U.S. indices were down anywhere from 5.3% to 6.8% from the high.

For most of the indexes, they went out around the low for the quarter, with poor price action on Thursday.

While they are trying to find their footing today on Friday — the first day of the fourth quarter — it’s a mixed picture. 

Although Q4 tends to be a strong period for the stock market, it also can see periods of heavy volatility, particularly in October.

Currently, we’re in the midst of a mild pullback, down about 5% from the highs.

Some think a 10% dip is coming. Others expect new highs in the S&P 500 before year-end.

Let’s look at each chart as we kickoff Q4.

Trading the QQQ ETF

Daily chart of the QQQ ETF.

Daily chart of the QQQ ETF. 

I took a look at the Invesco QQQ Trust  (QQQ) - Get Invesco QQQ Trust Report earlier in the week and it’s clear that bulls are trying to carve out a low around the 21-week moving average and the backside of prior uptrend resistance.

The Nasdaq was the weakest of the group to start Q4 on Friday. It’s also riding a four-day losing streak.

On the plus side, it broke the September low and then reclaimed it — staving off a monthly-down rotation in the process. At least for now.

Aggressive bulls can consider a long position against Friday’s low and look for a rebound.

On the upside, keep the 10-day moving average in mind, followed by the 50-day. That’s for a short-term bounce.

For a longer term move, bulls have a lot to prove. That’s true for most of the indices at this point. For the QQQ, it needs to clear $375 in order for bulls to gain some runway momentum.

Keep in mind: Apple  (AAPL) - Get Apple Inc. (AAPL) Report and Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report make up more than 20% of the QQQ, while almost half the ETF is FAANG plus Tesla  (TSLA) - Get Tesla Inc Report. How these six names trade will have a big effect on the QQQ.

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Trading the S&P 500

Daily chart of the S&P 500.

Daily chart of the S&P 500.

Like the QQQ, aggressive bulls have a nice setup in the S&P 500 as it broke its September low but was able to reclaim it. Traders can use a stop-loss just below today’s low and look to catch an upside bounce.

Specifically, that’s up to the 21-week moving average, followed by 4,385 — which is active resistance — then 4,400. There is an open gap up at 4,436 if it really starts to squeeze higher. 

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A break of Friday’s low could put 4,230 in play, followed by the 200-day moving average. For equity investors, they can trade the SPDR S&P 500 ETF Trust  (SPY) - Get SPDR S&P 500 ETF Trust Report.

Trading the Dow

Daily chart of the DIA ETF.

Daily chart of the DIA ETF. 

For the Dow, we’ll be looking at the SPDR Dow Jones Industrial Average ETF  (DIA) - Get SPDR Dow Jones Industrial Average ETF Trust Report.

After topping out in mid-August, the Dow continues to make a series of lower highs and now finds itself below most of its major moving averages.

This one has been a bit messier and the levels aren’t as clear. Broadly speaking, a move below $336 likely gives us a test of the 200-day moving average. At this point, the DIA may as well fill the gap down at $331.60.

On the upside, let’s see if the DIA can clear $350 — thus reclaiming all its major moving averages in the process.

In other words, I like the Dow ETF on a larger rotation to the upside or a deeper dip into the low-$330s. Otherwise, a rally into the $347.50 to $350 area likely gets sold.

Trading the Russell

Daily chart of the IWM ETF.

Daily chart of the IWM ETF. 

Last but not least, we have the Russell 2000. To illustrate, I’m using a weekly chart of the iShares Russell 2000 ETF  (IWM) - Get iShares Russell 2000 ETF Report.

This one is tough. On some days, it displays robust relative strength, outpacing all the other indices on the upside. Other days, it’s the sole loser in the group. 

Quite honestly, the charts reflect this split, as it’s been range-bound for several quarters. 

Stuck at the 10-week, 21-week and weekly VWAP measure now, it gives us not a lot of clarity.

Bears need a larger rally to the upside to short and bulls need a deeper dip to buy.

For the former, see how the Russell handles downtrend resistance (blue line). Above that opens the door to $234.50. Above $235 and we could see a long-awaited breakout in this one.

On the downside, I’d like to see a dip down to uptrend support and the 50-week moving average for a low-risk entry. A close below $207 could signal more pain ahead if it’s not quickly reclaimed.

So Which Index Will Perform Best?

The IWM has been holding up the best lately, but it’s not exactly robust outperformance. 

That said, the S&P 500 and Nasdaq have come down the quickest, which makes me think they may have the sharpest rebound — especially if megacap tech leads the way. 

For now, I am leaning towards the QQQ and the IWM as being our best Q4 performers. The QQQ tends to be a great performer, while the IWM easily has the best performance over the past 12 months and is consolidating its gains nicely. 

But we need the indices to put in a low before we start to talk about a rally. And so far, we don’t have much evidence that that’s the case.