QQQ (Nasdaq 100 Tracking ETF) offers an objective, yet aggressive entry on today’s breakout back above the 200-day EMA & this secondary uptrend line on the expectation this breakout will fail by the end of this week along with other factors.
QQQ daily Nov 7th
The price targets are T1 at 160.60 & T2 at 152.55 with a maximum suggested stop of a daily close above 178.72. The suggested beta-adjusted position size for this trade is 1.0 (make sure to factor in the 2x or 3x leverage if opting to use QID or SQQQ as a proxy for shorting QQQ).
The current price at this time is 175.00 although the optimal entry range is +/- 1% above or below that (but not above 178.00). Another option would be to either take a partial starter position here (or hold off on taking a position right now) and wait until both QQQ & SPY close back down below their 200-day EMAs, either on a daily basis or even better on a weekly closing basis. If so, that would provide another objective add-on or new short entry.
The are two primary consideration that goes into every trade that I take. First, the R/R (risk-to-reward profile) must be favorable as typically, I like to use an R/R of 3:1 or better. That means that I will risk about $1 of potential loss, if stopped out, for every $3 of profit potential, if my target is hit.
The second factor is the expected probability of the trade panning out, i.e.- the likelihood of the trade reaching my preferred price target(s) before my stop(s). In the case of this trade, the above average R/R is somewhat, but not completely, offset by my degree of confidence as to whether or not the trade will pan out.
Another way to spin that is I believe that the relatively minor 2% – 3% that I am risking on this trade, if stopped out, pales in comparison to the roughly 13% profit potential if my final target is reached. As such, the above average R/R more than offsets the fact that this trade runs a higher risk of being stopped out as do the average swing trades that I take.
I suspect that a good percentage of traders would prefer to go long vs. short on a day like today, with QQQ rallying up a respectable 2½% and both the S&P 500 & Nasdaq 100 moving back above their 200-day EMAs as well as some other price resistance levels. As always, pass if this aggressive trading style, which entails shorting when the near-term trend is bullish & on the expectation of a failed attempt to close back above the key 200-day/40-week EMAs, which has yet to even occur.
Essentially, I am going off the premise that the October breakdowns of the major stock indices below some key trendlines & weekly moving averages provided powerful sell signals that indicate the move down off the early Oct highs into the late Oct lows was the first leg down in a larger correction or bear market with more to come & the rally off the Oct 29th lows simply being a counter-trend bounce with minimal upside left from this point.
That assumption may or may not prove to be correct. If so, the gain potential for a swing short entry around current levels is above-average, especially considering that if my analysis is correct, then the next leg down will be quite swift & impulsive, similar to the drop off the early Oct highs. If wrong, then I am risking a couple of percentage points which is overshadowed by the gain potential of roughly 12% if correct.
As always, pass on trade ideas that do not mesh with your own analysis, trading style, objective & risk tolerance.