Is The Paint Dry Yet?

• June 21, 2001
• Don Miller

Good
morning.

Today begins our daily journey into the world of Nasdaq 100
Tracking Fund
(
QQQ |
Quote |
Chart |
News |
PowerRating) intraday trading. Now before you get out
those “paint drying” and “grass growing”
analogies, this stock-scalper-turned-QQQ trader hopes to have you
doing cartwheels in no time…or at least considering trading
this highly liquid fund representing a market monitored by
thousands.

Before discussing today’s action, let’s set the stage a bit. 
Duke Heberlein did a great job of describing the QQQs in Part 1 of
his recent QQQ series, so I’ll refer you to Duke’s column for some
strong base building.  Suffice it to say that I’ve recently
converted from trading stocks to the QQQs largely because of the
growing liquidity, decimalization that reduced scalp profit
potential on individual stocks, and a general desire to trade a
fluid market where the direction can be more easily read than
individual stocks.

OK, so we’ll be using QQQ charts as our visual guide, right? 
Well, as the saying goes, “not exactly.”  We’ll
actually be using the E-Mini Nasdaq 100 (NQ01U for the September
contract or simply NQ) chart movements for reference purposes, so
you’ll see NQ charts in this column instead of QQQ charts. 
Why not simply use the QQQ chart?  Several reasons. 
First, both the NQ future contracts and QQQ cash values represent
the same class of assets (Nasdaq 100), so the prices of both must
move in tandem to prevent an unsustainable arbitrage condition. 
More importantly, I consider the E-Mini pace, flow and prints
“truer” than the QQQs.  While both are highly
liquid, QQQ charts and prints can reflect out-of-market ECN trades
or late prints that are irrelevant for decision making and can
skew certain signals, especially on one-minute charts.  An
additional benefit is that the NQ is charted on most applications
around the clock since it’s traded continuously (excluding
4:15-4:45pm EDT), as opposed to the QQQs which aren’t charted
pre-market on most applications which can lead to difficult chart
reads early in the A.M.  We’ll discuss these concepts in more
detail as time goes on. 

So let’s look at the chart we’ll be referencing each morning:

Thursday
June 21, 2001  10:55 AM EDT

OK,
make that charts. 
While I monitor six time frames (1, 3, 13, 30, daily, weekly)
throughout the day, we’ll simply reference the three- and 13-minute NQ
charts to discuss intraday movements and potential setups, along
with a snapshot of the daily NDX.X until the September futures
provides a bit more history.  Why multiple charts? 
Well, I basically believe in the theory of making sure the forest
isn’t on fire when chopping trees for a living.  As a
daytrader, my primary focus is on three-minute trends and
oscillations, using larger time frames for perspective and the
one-minute to fine-tune entries.

As far as the studies go, we’ll be referencing five-
and 15-period moving averages for trend detection, Bollinger Bands with
an extreme 2.618 standard deviation to set trading ranges, and 15-period stochastics to indicate momentum strength.  Remember
again we’re trading the QQQs, but referencing the NQ01U and NDX.X. 
If you’re wondering how to correlate NQ and QQQ prices, 20 points
on the NQs is worth about $0.40 on the QQQs.  Yet if the NQ
is signaling an entry or exit, one simply enters or exits the QQQs
regardless of price.  If you’re a bit queasy with the
concept, simply monitor both for a while and you’ll see the
benefits of using the NQ charts.  Ironically, doing so can
also actually help one reduce reliance on the great poker game
played on Level II by forcing one to simply trust the visual chart
signals (yes, that 30k Island bid really doesn’t mean anything).

OK, with that out of the way, let’s focus on today’s
intraday action which will
be the main focus as we move forward.  After yesterday’s
wonderfully volatile market (from a trader’s perspective anyway),
we’ve settled into a relatively tight and very quiet three-minute
range this morning with support provided initially by the 13-minute 15-Period MA.  Volume is extremely light as the market
digests its recent moves and tests the upper end of its recent
daily range.  At this point, I’m basically waiting for the
market to break one way or the other, using the three-minute MAs as
emerging trend guides.  The 13-minute 15-MA is particularly
key to watch as it reflects the early base for the morning. 
Any breakdown or base will be key in determining the market’s next
immediate move.

In the meantime, this is one of those “know when to press the
accelerator” vs. “know when to apply the brakes”
mornings, and after cruising the highway yesterday, we’re
currently in a bit of a traffic jam.

Is the paint dry yet?

Good
trading.