Buy the dip, don’t fight the Federal Reserve, and don’t fight the tape are long-standing memes on Wall Street. Usually one or two of them occurred here and there, but for the last two years, we’ve had all three together and larger than ever. Under the chairmanship of Jerome Powell, this Federal Reserve is the most aggressive ever. They all but committed to quantitative easing, even if it brings about inflation. In such an environment, it’s hard to short ProShares UltraPro QQQ (NASDAQ:TQQQ) stock. It took a beating last week but rebounded hard.
If you can’t short it, then it becomes a matter of when to buy. At the risk of concluding the article early, the easy answer is buy on dips and breakouts. If you missed the one that just happened, don’t worry — you can catch the next. Else there are lines just above that could invite new breakouts.
The most recent opportunity came on March 4 and 5, and then again on Monday. TQQQ stock is likely to face resistance here, so the easy work may be over for a bit. No worries, though, because it’s a matter of finding the next entry point. For that, we don’t always have to wait for dips. The biggest opportunity came mid December when the Nasdaq broke out from the September failure levels.
Buyer Beware
Before we go on, here comes the warning about the TQQQ. It is not for the casual investor because it moves really fast. In fact if the Nasdaq 100 moves 1% it moves 3%.
On Thursday it rallied 7%. But remember that this happens in both directions. If you get it wrong, you suffer losses three times as fast. The make-up of the fund is not risky since it tracks great tech stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). These are not speculative bets, they are rock solid investments.
Earlier we mentioned a bunch of Wall Street investment memes. Here is one that shocked most investors this week: Don’t short a dull market. I slapped the “dull” descriptive to this very exciting market because absolutely nothing has changed in a while. Yet for some reason, investors panicked out of great stocks on no triggers. Tesla (NASDAQ:TSLA) fell 40% from its highs. Apple and Nvidia (NASDAQ:NVDA) each lost more than 20%, and the list goes on.
Another source of excitement and shenanigans this year comes from the Reddit gang. Just a few days ago, when the Nasdaq was falling into an abyss, GameStop (NYSE:GME) was up big. There were liquidations of great stocks to cover losses in the gambling going on there.
Since Nothing Has Changed, Try TQQQ Stock
We still have the same challenges, and the full commitment of the government to offset them. First, the Fed has not change its bullish stance. Second, the White House is ready to release $1.9 trillion into the economy, the largest stimulus ever. Therefore the dips in tech stocks continue to be buying opportunities. The TQQQ still trails but if the stock market is higher in the future then it will also be winning.
The easy bounce has happened, but is not necessarily over. From here the bulls need a bit more work but it’s doable. The small caps, which include GME et al are up 12% in five days. That was 50% better than mega-tech stocks. In comparison, the TQQQ rallied 23% — almost double that of the small caps. Clearly it pays to own it, and the lower the better. But investors need strong intestinal fortitude for it. And funds like this are focused on daily targets — they are generally not good to hold over the long term.
A few years ago, Nasdaq tech stocks were the was the risky bets. Now it’s the opposite because they passed that baton to the frothy meme stocks. GME rallied and fell more than 50% three times in a day. That is sheer insanity and has absolutely nothing to do with investing not even trading. It cast a gambling shadow over the whole market.
The TQQQ having 3x the leverage also seems lunatic at times. If the Nasdaq is not fast enough for you, then this might be the thing. Often people use ETFs to diffuse single stock risk. This logic doesn’t lend itself well to leverage. It’s easier to catch a falling knife like TSLA at $530, than the TQQQ machete on bad days.
Important Levels to Watch
A week ago was the right time to buy it. Now that it has already bounced, it’s a bit dicier. Those who know the TQQQ probably already bought in. But there could be another leg higher if it holds above $88. That was a massive failure level last year, so it has history. If so, then the rally could resume and target the gap at $104 per share.
It is also OK to give back a bit, but not below $84. Else I would stop out for a trade. Falling below Friday’s low would open a new can of worms, with potentially bearish scenarios.
I also expect that there will be resistance starting from $92 to $96. That is where the bears will fight to keep control of the action (lower-highs). Above that would trigger another momentum buy signal to chase. If they fail again I’d buy the next hard dip in this macroeconomic setting.
At the risk of sounding bearish, I almost wish for surprise drops like last week. They open the door for easy short-term and (in some stocks) reasonable long-term opportunities. Getting long the TQQQ is the high-risk-high-reward way of investing. Yes, it’s fast but it has substance, not just memes.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
