The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is the Street’s go-to exchange-traded fund for a direct bet on the technology sector. It boasts such titans of industry as Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) among its top holdings.
Welcome to the other side of easy money, tech lovers.
Your good fortune while long lasting, was never meant to be everlasting. And its end appears to have arrived. Deterioration is beginning to mount; distribution is starting to count. Is this the end, the long-awaited comeuppance for the increasingly wealthy shareholders of tech stocks? Or, is it a ruse, a little trickery by the gods to shake out the weak hands?
Time will tell, but allow me to chronicle the crumbling and toss out an idea on how to capitalize on volatility’s return to the land of tech and the QQQ.
The price action in QQQ over the past month provides an insightful case study of the evolution of a top. While it remains to be seen if this is a short-term or long-term top, it is nevertheless a top.
Let’s take a look at the signs of deterioration one at a time. While each market rollover is somewhat unique, they all share similar characteristics. There’s no better way to improve your ability to spot a peak real-time than by studying peaks of the past.
QQQ Storm Clouds
The first cloud to arrive on an otherwise sunshiny year was the June 9 karate-chop from Hades. Epic volume accompanied the outsized down candle, suggesting intense institutional selling.
Click to Enlarge
If that wasn’t the clarion call that the winds were shifting in QQQ, I don’t know what was.
After a half-hearted bounce attempt, the second cloud arrived in the form of a lower pivot high created on June 26. The Nasdaq’s inability to retest its old peak was evidence that sellers were doubling down on their mutiny.
A third and final cloud arrived this week when QQQ finally breached its 50-day moving average. This marks the first time we’ve been below the 50-day in 2017. With the storm clouds now gathered in the Nasdaq and elsewhere, risk-averse investors would be wise in taking profits in areas, like tech, which are falling out of favor.
While this could all turn out to be a minor mid-summer misstep, the onus is on buyers to correct the damage that has been inflicted. Until QQQ can rise back above resistance ($142.35), I suggest being skeptical of rallies.
The Return of QQQ Volatility
At Thursday’s lows, the Nasdaq ETF was down 5.3% from its recent peak. That’s a garden-variety pullback by historical standards, but given the current low volatility regime, it certainly feels much worse. One development that’s certainly being cheered by option sellers is volatility’s return.
The QQQ’s implied volatility rank just tagged a new high for 2017 at 63% (not shown). And that means option premiums are higher than they’ve been … well, all year long.
One of the most direct ways to capitalize on the volatility surge is to sell an iron condor. The beauty of the strategy is it allows you to sidestep making a directional bet on a stock and wager instead that it won’t move as much as expected.
Sell the Aug $124/$129/$144/$149 iron condor for $1.12 or better. The position consists of selling an Aug $124/$129 bull put spread and an Aug $144/$149 bear call spread. The max profit is limited to the initial $1.12 credit received and will be captured if QQQ sits between $129 and $144 at expiration.
If you want to increase the odds of success, however, you could exit once you’ve captured 50% of max profit by closing the position if the condor value drops to 61 cents.
The max loss is $3.88 and will be lost if QQQ falls below $124 or rises above $149 at expiration.
As of this writing, Tyler Craig held bearish option positions in QQQ.
