Consider This Trade As A Portfolio Hedge
I
don’t like what I’m seeing in the Nasdaq, QQQs, SMHs, etc. from
a technical perspective. Tech is having trouble. Here are my observations…
First,
price-and-volume action on the Nasdaq has been terrible. Between 1/27/04 and
now there have been four distribution days and zero accumulation days. Each bounce has been on lighter volume — including Friday. Today the “big bounceâ€
from Friday stalled out pretty quick and left us with a narrow range bar. OK,
so Nasdaq accumulation/distribution stinks. Now let’s look at a short-term
QQQ chart:
src=”https://tradingmarkets.com/media/2004/Hanna/rh020904-10.gif” width=”645″ height=”395″ />
In Charting
101 I learned that a series of lower lows and lower highs is called a “downtrendâ€.
How about
a longer-term chart?
src=”https://tradingmarkets.com/media/2004/Hanna/rh020904-11.gif” width=”645″ height=”395″ />
We see
that Friday’s bounce came near:
1) The
50-day moving average, which has consistently acted as support since March.
2) The 38.2% Fib Retracement of the Sep-Jan upmove.
3) The 50% Fib Retracement of the Dec-Jan upmove.
4) Trendlines that can be drawn from August-now or March-now and touching the
December lows.
In other
words, there were a lot of people willing to step in at those levels last week,
and that is just what happened. If that support is broken, I don’t see anything
until around 1950 (some fibs). Then a little below 1900 (price support &
fibs). Then around 1800 (price support and fibs).
So how
might I look to play this? Well, we have a short-term downtrend threatening
to become an intermediate-term downtrend. Today’s narrow range day should
set up many short opportunities with solid risk/reward ratios. For instance,
if you were to consider shorting the QQQ’s below today’s low of 37.05, your
stop could be set above today’s high of 37.38.
(If you
wanted to give it a little more room you could set it above the Feb 2 high of
37.48. Any move above that would disrupt the pattern of lower lows and
lower highs, since a higher high would then be made.)
Since
you would be risking $0.33, 2-for-1 money management would dictate that you
should take partial profits around $36.39. This is just above the recent
lows. If those lows are taken out, you have a potential “home run†short
on the remaining shares. Those people that are still significantly long
may want to consider a trade like this as a nice hedge to their portfolio.
While
the QQQs may be used, by scanning your database for stocks that have mimicked
the action in the Nasdaq lately you should be able to find opportunities with
even better risk/reward.
Do I believe
this will turn into a long and brutal downtrend? No. Does it matter
what I believe? No. Making money is about find opportunities with
good risk/reward. I see a potential short opportunity here, and if I’m
wrong it won’t take long before I know it, and it shouldn’t cost too much either.
If right, there’s the potential to make significantly more than what is being
risked.
Best of
luck with your trading.
Rob Hanna