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.
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.