Hypothetical Trade Summary: Shorting NDX / QQQ here at 286. Price target at 260. Stop = 291.00. Capital risk = $3,000 (3% of a 100K trading account). Maximum profit = $15,600. Reward to Risk: 5.2 / 1
Within the last several weeks, I've published several ideas supporting a bearish view for NASDAQ:NDX and NASDAQ:QQQ as well as the major cryptocurrencies (e.g., BITSTAMP:BTCUSD COINBASE:BTCUSD FTX:BTCUSD; see also AMEX:BITO for an ETF tracking BTC futures .) Those ideas will be linked below.
As a result of today's stalling action in price, this idea opens a hypothetical short position for educational purposes. The entry is quite near several key resistance levels where price appeared to be failing today. I had wanted to post this minutes before the close, but could not write the idea quickly enough. On the 30m chart below of QQQ, note how price fell into the low of the day after CPI, and then price rallied up near the 288.39 at the .50 R of the 7/8 to 7/13 swing decline. Price could not reach this .50 R though, and in fact, price fell back below the .382 R of this swing high to low. Later today, I will post further technical arguments for the trade within the update section.
Because the stop remains close to the entry, the trade has a higher probability of failing due to being stopped. Actually, any trade could fail for this reason, but when trades are closer to stops, they tend to fail more often. But with a tighter stop, losses are kept smaller. Here, the idea was to place a tight stop given the nature of this market (super choppy with unpredictable whipsaws in both directions). Keeping losses small is an important part of a successful trading approach. But the downside to a tight stop is that the trade has less room to breathe.
Given price action today, it appeared that price was failing at key resistance levels. These levels will be discussed in the comments. And SPX, interestingly, performed worse today than NDX, so the better short might be SPX, not NDX. This outperformance of NDX over other indices may be a result of recession fears growing as a result of increasingly hawkish Fed policy near term. But this post proposes shorting NDX to provide continuity with prior views on NDX and b/c NDX likely has further downside ahead.
The trade may fail due to a whipsaw, similar to those seen recently across the board in equity indices and crypto recently (and bear markets commonly). For example, last week, July 5, 2022, a bearish view was taken on NDX / QQQ at major trendline resistance where price had stalled and struggled. This level was 288-290, which was supported by key Fibonacci levels and a downtrend line going back months. Yet price finally whipsawed above these levels as the NDX outperformed the other indices last week. But now price has fallen back below 288-290, though it is still above the down trendline that it violated last week.
If a whipsaw occurs, this will be apparent only after price shows that an upside move through resistance was a false break with price falling back below the key resistance levels. By that point, however, the trade will have been stopped. But if the stop is hit due to a whipsaw, the trade could be re-entered a second time if the setup remains valid and only if / when a whipsaw (false breakout) is confirmed by a break back below resistance.
Follow along and enjoy the ride! Create your own long / short as well, and post in the comments. Cheers!
DISCLAIMER: This is a hypothetical short trade using TV's short-position calculator. This idea is solely for educational / entertainment purposes and does not constitute financial advice or an investment recommendation and cannot account for any person's particular financial circumstances. I would never want other investors / traders to lose money by relying *solely* on this idea rather than doing their own due diligence. Before entering any trade, please evaluate the risks of (i) the instrument / security being traded, (ii) the type of trade and its timeframe, (iii) risks inherent in that type of trade and its time frame, (iv) the inherent risks of shorting securities (presenting unlimited risk without hard stops in place), (v) the inherent risks of trading options, leveraged ETFs, and cryptocurrencies, and (vi) all financial risks arising each person's personal financial circumstances.
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Note the moving averages on the 30m time frame are bearishly sloped and stacked. Note how price has failed to recover key Fibonacci retracement points for the recent decline from July 8 to July 13 (most recent swing high to swing low).
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Bearish momentum continues (despite today's rally) using Stochastics on 195m chart and daily charts. Only the 195m chart is shown below.
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RSI on the daily chart for QQQ shows a lower RSI high for most recent July 8 RSI peak when compared to the July 2 RSI peak. If RSI does not make a lower low before turning up, that would also present a sign of strength and a potential reason to exit this the trade.
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Lastly, two more simple but significant technical reasons for the bearish view on QQQ / NDX include the following: (1) price has closed below the 8-day EMA, which slopes downward and is bearishly positioned below the 21-day EMA, and (2) price has closed today back below 286.82, 2-year Fibonacci level that coincides with the levels at 286.41 and 286.58 mentioned above.
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Volatility compression tends to lead to volatility expansion. It's a vol cycle. Currently, volatility has compressed as evident by daily Bollinger Bands (see below) set at 2 standard deviations (20 period). Volatility is likely to expand soon as price is within a volatility "squeeze" on the daily timeframe.
A squeeze condition by itself cannot show with certainty which way the squeeze will breakout. But the failure at key levels today, the close below the 8-EMA (daily) and the bearish momentum all suggest that the breakout may be to the downside.
I am reminded that monthly OPEX is on Friday. This could create unusual price behaviors leading into it, though not always. So a false breakout to the upside could occur, negating this trade. OPEX can often create unusual price reactions and patterns that go against what many expect.
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Making progress toward the target here. Now that an equity cushion exists for the trade, the stops should be moved to breakeven so that the trade is now risk free. Stop now at 286.
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Interesting to note that NDX is again outperforming SPX today as it has over the past few weeks. But I suspect QQQ could underperform in the coming days as QQQ/SPY meets downtrend line resistance (orange line)—the spread chart also has a short uptrend line showing QQQ's outperformance vs. SPY over the past few weeks. I'm watching that relationship as the markets appear to be flushing lower again.
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But look at this longer-term trendline on the weekly chart of QQQ/SPY. It's holding support along with the 200-week moving average. If QQQ/SPY finds continued support at this upward trendline, would market be nearing a bottom? Perhaps QQQ / NDX will be ready to lead after another leg lower. But if the 200-week and the long-term trendline breaks, all bets are off for tech-heavy NDX.
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The blue arrow shows where QQQ / NDX stopped falling this morning, which was 3 cents above the .618 R line shown. This is why I have tried to learn (and keep learning) Fibonacci—look at all the yellow circles where price traded around that .618 R in the past few weeks! It's just uncanny how Fib seems to help find the key levels frequently (though not always)
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Earlier today, when an equity cushion developed, the stop loss was moved to breakeven. The trade has been cut loose at breakeven, no loss, no risk. If the setup re-emerges, the trade will be automatically re-entered with a break below 286.00.
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Based on market internals, this hypothetical trade will be re-entered. The stop will be returned to the original level for the stop at 291. QQQ price just failed at key Fibonacci levels 1. 287.36 (where wave A of today's bounce = wave B), and 2. 286.58 and 286.26 Fib retracement levels discussed in the post above. QQQ / NDX, by the way, has been by far the best performing index today. The better short among the indices is RUT / IWM or DIA, at least today. This could change tomorrow. But relative to SPX and RUT and DIA, it has fallen less, risen more and overall had better relative strength. Is this a sign of recessionary fears?
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A veteran options / futures trader with 30 years' experience taught me that the "clearing period" for equities markets lasts about 1-2 hours. She explained that it's prudent to wait until this clearing period ends to exit trades that have technically reached stop levels. Hard stops (an actual stop-loss order) may be used by some traders, but many do not given that MM and other traders see those and take them out. This gives them flexibility to exit when price briefly tags a stop level. This morning, QQQ reached 291.23, just a few cents beyond the stop level. But it quickly fell back. If QQQ reaches and holds above 291.23 again after 11 am EST, the trade will be stopped and exited.
For now, QQQ is trading just below another key Fibonacci level at 290.36 and 290.41. I will post charts of those levels below.
@amaloyz, Haha, yes! Thanks for your comment. Do you have any trades on at the moment?
I didn't include much about my options trades b/c they're much riskier than trading the underlying index ETF, and I don't want to be viewed as offering trading advice . . . . But full disclosure: I have an open call credit spread on QQQ (bearish) that is deep ITM, so as price falls it's slowing working out.