Nasdaq ETF Trading Strategies: Buying and Selling Below the 200-day
Anyone who has followed our research for any length of time knows that we are big believers in buying above the 200-day moving average and selling short below it. There are few things that our research into short term stock – and ETF – behavior is more clear on than that.
But are there instances when traders can make speculative, special situations bets on a market – such as the Nasdaq or Nasdaq 100— that is trading below its 200-day moving average? Can traders use the same tools that help them spot value above the 200-day moving average also be used to find relative value below it?
Coming into trading on Wednesday, the QQQQ – with its Short Term PowerRating of 3 and 2-period RSI of more than 80 – was already exceptionally overbought. From our point of view, this clearly distinguished the QQQQ as a market to avoid, at a minimum, or to sell short. For months we have successfully spotted overbought ETFs trading below their 200-day moving averages and sold those ETFs short for consistent, high probability gains.
But what if you are a bull when it comes to the markets in general and the QQQQ in specific? Is there anything in our ETF trading strategies that can help traders who are determined to buy the QQQQ do so with a better chance of success and profit?
Although we are firm believers in not buying markets trading below their 200-day moving averages, the tools we use – such as the 2-period RSI – are still valuable ones for those who do. For example, a short term trader who wants to buy the QQQQ – even though it is trading below its 200-day moving average – as a sort of “special situation” speculative trade, can use the 2-period RSI to spot those instances when the QQQQ is short-term undervalued below the 200-day moving average and look to build their long position when that 2-period RSI turns down.
In doing so, a trader can lessen the risk by at least buying the QQQQ when it is relatively oversold, rather than when it is spiking higher. This is important because many times buying under the 200-day moving average is as much an emotional trade as a tactical one. After all, it is far easier psychologically to buy a market below the 200-day moving average when it shows strength and everyone is shouting about how the “bottom is in”.
But, as we know, the easy trade is often not the best trade. If a trader is going to take on the additional risk of buying a market below the 200-day moving average, then he or she should at least try to buy that market when it is oversold and sellers are eager and aggressive rather than when that market is showing strength and the greed/optimism of buyers is making that market more expensive with every trade.
Again, we do not like to or recommend buying ETFs below the 200-day moving average. But for those who do, tools we have developed like the 2-period RSI can help short term traders turn speculative, special situations trades into profitable ones.
David Penn is Editor in Chief at TradingMarkets.com.