by Serge Berger | April 7, 2014 12:25 pm
“Patience. “Take your time.” “Discipline.” These are words I keep repeating to myself these days as it pertains to the PowerShares QQQ Trust (QQQ) — and specifically, many of the momentum stocks therein that are being chopped for public display.
As you no doubt know by now, the Nasdaq was sold off hard Friday, to the tune of 2.6%. That sent it to a 0.7% loss for the week and -1.2% for the year-to-date, and it’s off a good 5.3% from its 2014 highs. Most see this as just a function of air coming out of social media and biotech stocks. However, what seems to be less consensus here is the notion that the Nasdaq-100 — represented by the QQQ ETF — could easily drop at least another 4% from Friday’s closing levels.
In many ways, last Friday’s selloff in U.S. stocks wasn’t just a classic risk-off move. It also led to more mean reversion lower in many of the very same momentum stocks that were declared oversold earlier in the week by market pundits. So, “mean reversion” is the term to keep in mind as far as momentum stocks are concerned.
And until such time when these momentum stocks confirm positive bullish reversals, odds on the long side remain weak.
Patience is required. Itching to do a trade? Try some yoga to calm yourself down.
It is precisely at these types of junctures where technical analysis can help us gain a great deal of perspective.
Drawing a straightforward line of support as I did on the QQQ below can highlight support reference areas, which are not to be confused with absolute points. (Absolute to-the-tick points work rarely, if ever, as important support/resistance areas.)
The support line on the above chart dates back to the 2009 lows. Note how last summer, the QQQ began to charge higher in a straight line, and how as a result it became very extended above this line.
So, as a first better support level in this context, I view the 200-day moving average (red line, currently near $82.30) appropriate, followed by the 2009 support line (currently closer to $78). Or, roughly another 4% and 8% lower, respectively.
I do not have any bets on the QQQ falling to these support levels, but am merely pointing out these levels that, from medium- and longer-term views, would signify better mean-reversion moves. Ergo, I have no interest in buying into the Nasdaq or any of its major industry groups until I see better stabilization on the charts, or one or two of those support levels reached.
This isn’t rocket science, but it does require iron discipline. It’s difficult to not force a trade when no high-probability opportunities are to be had.
As an FYI, the Nasdaq 100 Volatility Index (VXN) isn’t exactly in any freak-out territory, either. It looks like considerably lower levels in the QQQ are needed for implied volatility to spike more meaningfully.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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