PowerShares QQQ Trust (ETF) (NASDAQ:QQQ) have been on a historic run over the past year. QQQ has rallied nearly 35% over the past 12 months since hitting the pre-election low of $113.45 November 4. The QQQ ETF has also vastly outperformed the S&P 500 since the beginning of the year, rising 29% versus a 16.5% gain for the broader market. I think it is a case of too far, too fast and expect it to pull back slightly and retrace some of the recent gains.
QQQ contains the biggest of the big names of the NASDAQ: Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) comprise over 34% of the overall weighting.
Certainly earnings out of AAPL stock later today will have a meaningful impact on the QQQ ETF. The reaction from FB shares overnight, which sold off even after a solid earnings report after the close yesterday, likely portends to further weakness ahead for the NASDAQ names.
Shares of QQQ are definitely getting overbought at current levels. The 9-day RSI has breached the 75 reading, which has been a sign of a short term top in the past. While the trend line still continues to head higher seemingly unabated, the recent rally has the NASDAQ trading at a big premium to both the uptrend line and the 50-day moving average.
Previous instances when this occurred have been a reliable indication of over exuberance in the past.
Click to Enlarge The price action from yesterday, with QQQ opening at new all-time highs only to ultimately reverse course and close lower on the day, shows a reversal pattern. This is also a hallmark of a top being formed, especially following such a strong rally. It also reinforces the notion that the buying may be getting a little overdone at current levels.
So to position for a short-term pullback in QQQ back toward the trendline, a simple put buy makes intuitive sense.
QQQ ETF Trade Idea
Buy to open the QQQ Nov $153 puts @ $2.50.
Maximum risk on the trade is the premium paid of $250 per contract. A pullback towards both the trendline and 50-day moving average near the $147 level would result in a gain of over 100% gain on the trade.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
