Nasdaq Trading Strategies: Waiting for the Buyers
Stocks are in positive territory in the first hour after the opening bell on Tuesday — though traders remain anxious in the wake of Monday’s late-session sell-off. Adding to the anxiety is the fact Treasury secretary Paulson, Fed Chairman Bernanke and FDIC chief Bair are all testifying before Congress this morning.
We are at levels in the Nasdaq that we have not seen since May 2003 — which means that in many ways, the great bull market run from the spring of 2003 to the fall of 2007 has been all but retraced. The wager, for the time being, is that stocks bottomed in mid-to-late October and that a rally of some significance is the likely consequence.
PowerShares QQQ Trust, QQQQ
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PowerRating) Short Term PowerRating 6. RSI(2): 16.07
This however is a position trade, at best, how can swing traders who look to buy based on undervaluation and sell on overvaluation best position themselves in the current environment?
The Nasdaq is in a relatively oversold state. Even though this oversold condition is occurring below the 200-day moving average — meaning that oversold can become even more oversold — it still suggests stocks are already supersaturated with sellers. In such instances, it often does not take a great deal of buying pressure to begin to encourage those who have been aggressively selling to slow down.
ProShares Short QQQ ETF, PSQ
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PowerRating) Short Term PowerRating 4. RSI(2): 75.72
When buying pressure enters an oversold market, at least in the short term, it can do two things: one, it can encourage those who are liquidating shares to hold off in the hopes that they might be able to get better prices in the event of a rally, even a modest one. Two, any significant buying pressure in an oversold market will begin to force short sellers to reconsider their exposure and start covering their short sales, buying stock and helping to move prices still higher.
ProShares Ultra QQQ ETF, QLD
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PowerRating) Short Term PowerRating 5. RSI(2): 21.10
The Nasdaq, at this time, is not more oversold than are the Dow industrials and the S&P 500. That said, comparing a chart of the Nasdaq to one of the other two major markets reveals a market that has actually made a second lower low since the low in early October. Compare this with the relatively more sideways (potential) bottoming action in the Industrials and S&P 500. While this paints a more pessimistic picture of the Nasdaq in the near term, it also suggests an even greater potential for upside should the buying pressure I mentioned begin to re-enter the market in response to increasingly oversold conditions.
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David Penn is Editor in Chief at TradingMarkets.com.