I recently read an excellent article about non-confirmation at Dr. Brett’s Traderfeed. He explained that when market leading stocks do not confirm an advance in the major indexes (e.g., SPY, QQQQ), the move tends to fail. Thus, confirmation is like the engine under the hood of a moving vehicle. If the engine is firing, the vehicle is healthy. If the engine is sputtering, the vehicle will soon slow (and may even need repair).
Last Wednesday (4/22) I Twitted some crucial non-conformation when the QQQQ broke out to new highs for the March/April rally. At the time, tech leaders AMZN and AAPL were not about to break to new highs. However, GOOG was flirting with the breakout. I figured if GOOG could break, AMZN and AAPL may start to follow and then the QQQQ could establish a confirmed breakout. As the QQQQ tested the previous high at 33.50, GOOG broke to a new high (389.98) by only three pennies then quickly failed on hard selling. I immediately knew the QQQQ move would fail.
In the chart below, you can see how moments later the QQQQ broke to a new high (33.53) only to fail before the ink dried for new longs.
I Twitted, “$QQQQ without $AMZN $AAPL and now $GOOG. Like sending granny to the frontline alone.” Minutes later the QQQQ fate was sealed: “I guess granny couldn’t slay the dragon $QQQQ.” Thus, we had a textbook case of non-confirmation like Dr. Brett taught us.
Fast-forward to Friday’s retest of the highs and we had a confirmation signal which increased the odds of a successful breakout to new highs. Although AAPL was lagging, AMZN was displaying Hulk-like strength following earnings. Once again, GOOG was the swing vote on the court. If GOOG could get going, a good trade setup was on the screen. As you can see below, GOOG started breaking strong to new highs for the day.
As the highs held (another critical variable) and GOOG bidders started taking the offers at market, a QQQQ trade of the break was assured at least small success.
So remember: if you don’t confirm, you get the burn!