TQQQ: Seize The Opportunity To Generate Significant Alpha (Technical Analysis)

Summary

  • The market invalidated our previous Buy thesis on the TQQQ initially in June. However, it quickly stanched its steep sell-off before recovering and revalidating our original view.
  • Therefore, the re-entry signal has strengthened the conviction of our Buy rating. We also observed robust medium- and long-term bottoming signals, which suggests solid buying support.
  • The TQQQ's 5Y total return CAGR is currently lagging behind its 10Y metric. However, we believe the mean reversion opportunity is ripe, offering potentially significant alpha moving ahead.
  • Therefore, we revise our rating from Buy to Strong Buy. While its near-term is overbought, we encourage investors to capitalize on its near-term volatility to add exposure.
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Bull and bear market

Kameleon007

Thesis

We highlighted in our previous article that the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) was at a bottom. Interestingly, the ETF invalidated the set-up initially but recovered quickly and revalidated it accordingly.

Therefore, it created what we term a re-entry signal. Such signals corroborate the original bear trap (indicating the market decisively denied further selling downside) thesis. Consequently, it has strengthened our conviction that the TQQQ's medium-term bottom is increasingly likely to hold.

Furthermore, the TQQQ is also at its long-term bottom. Our analysis of TQQQ's previous long-term bottoms indicates that long-term dip buyers had consistently used such opportunities to add exposure, supporting the buying upside.

Therefore, we don't expect it to be different in the current bear market. As a result, it affords astute investors another fantastic opportunity to generate significant alpha when the TQQQ recovers from its medium- and long-term bottom.

As a result, we revise our rating on the TQQQ from Buy to Strong Buy.

Don't Miss TQQQ's Potential Long-Term Bottom Opportunity

TQQQ price chart (monthly)

TQQQ price chart (monthly) (TradingView)

As seen above, TQQQ is "hugging" its critical 50-month moving average (MA) (blue line in our chart) on its long-term chart. The 50-month MA has robustly and consistently supported the TQQQ's advance for the past ten years, including the 2018 and 2020 bear market bottoms.

Therefore, we are confident that the TQQQ would find robust buying support at the current levels, despite the pessimism in the market.

Note that the TQQQ had already formed a bear trap on its long-term chart in May but was invalidated in June. However, it has attempted to regain upward momentum and re-establish its long-term bottoming signal in July but has faced resistance so far.

Notwithstanding, we believe the long-term bottoming process remains intact as long as June lows hold firmly.

TQQQ price chart (weekly)

TQQQ price chart (weekly) (TradingView)

Moving on to its medium-term (weekly) chart, the price action is more constructive. Note that its May bear trap was also invalidated in June initially. However, a re-entry signal appeared in late June, revalidating May's medium-term bottoming signal.

We accord higher conviction to re-entry signals, as they indicate the potency of the original thesis. It suggests that the market had used another rapid sell-off to create another false break to the downside, ensnaring more bearish/pessimistic investors/traders before reversing the tide decisively.

Furthermore, the TQQQ has continued to consolidate resiliently above its June lows. Therefore, we believe the medium- and long-term picture are increasingly aligned, even though the ETF is at near-term overbought levels.

Therefore, short-term volatility is still expected as the market digests the weak hands. But we believe investors should capitalize on such volatility to add to TQQQ's highly constructive medium- and long-term bottoming process.

Potentially Generate Significant Alpha With The TQQQ

Chart
Data by YCharts

As seen above, the TQQQ is still outperforming the Invesco QQQ ETF (QQQ) over the past five years, despite giving up much of its gains from November 2021. Notably, the TQQQ posted a 5Y total return CAGR of 25.41% against the QQQ's 16.6%.

Chart
Data by YCharts

However, the TQQQ's 10Y total return CAGR is way superior to the QQQ's 18.13%. Given the medium- and long-term bottoming process seen in the TQQQ's charts, we believe the mean reversion to its 10Y average could likely occur in the medium term.

Therefore, astute investors who capitalize on the TQQQ's bottoming process could generate significant alpha and ride the next wave up as the TQQQ mean reverts.

Is The TQQQ ETF A Buy, Sell, Or Hold?

We revise our rating on the TQQQ from Buy to Strong Buy.

We are confident that the medium- and long-term bottoming signals on the TQQQ are looking increasingly constructive. If the TQQQ can validate its re-entry signal on its long-term chart, then the medium- and the long-term picture will be fully aligned.

We believe the mean reversion opportunity on the TQQQ to generate significant alpha moving forward is on the horizon. Therefore, investors should capitalize on its near-term volatility to ride it back up subsequently.

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This article was written by

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Sifting through the ultimate growth stocks for your portfolio

I'm JR, the lead writer and founder of JR Research and Ultimate Growth Investing Marketplace service. Our team is committed to bringing more clarity to investors in their investment decisions.

Our marketplace service focuses on a price-action-based approach to growth and technology stocks, supported by fundamental analysis. In addition, our general SA site discusses stocks from various sectors and industries. 

Our discussion mainly focuses on a short- to medium-term thesis. While we hold stocks for the long-term, we also use appropriate opportunities to benefit from short- to medium-term swings, leveraging long (directionally bullish) or short (directionally bearish) set-ups. 

My LinkedIn: www.linkedin.com/in/seekjo







Disclosure: I/we have a beneficial long position in the shares of GOOGL, MSFT, META, AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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