3SOF

Profile:
UltraShort QQQ ProShares seeks daily investment results, before fees and expenses that correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index

Trading Idea:

The markets are acting as if in potential continued longer term bear mode and not so much in bullish bouncing off of and not revisiting lows type mode. Whilst there are very strong sectors and stocks out there – Oil, Gas, Agriculture, Steel to name the most visible, they are being outweighed by the weak and underperformers. With that premise in mind I wanted us to have exposure to this weakness at the same time understanding not all our subscribers can sell short. So we can use QID to profit from weakness without having to sell short.

Technical Analysis:

QID inversely tracks the NDX (Nasdaq 100) which I think is looking very weak. Looking at NDX from the March '08 lows it has recovered strongly moving through resistance and topped out around 2040 which coincidentally equates to 61.8% Fibonacci retracement from the Oct '07 highs. Yesterday the NDX bounced right into resistance in the shape of the 200SMA and descending resistance. I think from here the NDX will fail at this resistance and breakdown and challenge former lows.

Looking at the QID chart we have the inverse picture in play, expecting QID to breakout through resistance (in the form of longer term moving averages) and challenge former highs. The shape of the QID chart presents a great risk to reward entry opportunity. The fact that it twice the inverse of the NDX performance is fine, the volatility is relatively low (around 4%) and the extra exposure to the short side relative to our portfolio mix is a positive situation.

For this trade we will analyze the NDX chart first and then the QID chart, as it is the NDX performance that gates what the QID will do.

We will introduce a stop on the next update.


Fundamentals:

For a list of the component companies of the Nasdaq 100 (NDX) take a look at the attached link:

http://www.price-data.com/ndx_symbols.cfm

For ProShares and UltraShort information (the ETF provider) see the attached link:

http://www.proshares.com/abtfunds


Trading Plan:
Buy QID at or around the open

Update:

I had a few messages yesterday asking why I chose the Nasdaq 100 (NDX) over some other index such as the S&P500 (SPX). The answer is quite simple from my perspective:

1) NDX has had quite a nice rebound from the March lows retracing a large portion of the end of year decline only topping out earlier this month. It has created a top reversal pattern and just started to decline. Conclusion NDX is earlier in it's weakness cycle than forinstance SPX, so there is a better risk / reward opportunity.
2) The strong sectors right now - Oil, Gas, Agriculture, Metals, none of these are represented in the NDX. This further reinforces that NDX can offer us a better trade opportunity.

Futures were weak out the gate yesterday and the NDX gapped down at the open and never looked back RIMM lead the way down with an earnings miss and other NDX heavies such as AAPL and GOOG look technically weak.  The NDX pretty much filled a gap going back to April, but my expectation is for significantly more downward action to come. Perhaps even retest of March lows around 1700.

We entered QID on the gap up safe in the knowledge that the risk / reward on the trade was nicely in our favour. If in the course of time we get an NDX retest of March lows then we would be looking at QID around $55, that said a more logical target would be in the $47 to $50 zone (being 50 to 61.8% Fib retracement on the QID chart. Today I will introduce a stop which will be placed outside ascending support and the 50EMA on QID chart, so we have a lot of support there which should make for a safe position.

Trading Plan:

HOLD QID with Stop at $39.90

Update:

The NDX continues to be a laggard of the indexes. If you take a look at a selection of charts from the component companies of the NDX you will quickly gain a picture of general weakness. Many charts well below long term support, many charts recently broken long term support, a few charts resting just above key support and a very small handfull of charts performing (ATVI for example). Taken together you have the overall weakness as reflected in the NDX index. Right now I am unable to see any catalyst that will reverse this general weakness. In fact you could look at a stock like ATVI and conclude it might make a nice short as it has plenty of space to return back to longer term support.

The QID trade is developing nicely with plenty of long and medium term resistance broken to the upside with the likleyhood of continued movement in our favour. Today I am raising our stop to $40.90 safely outside volatility, ascending and time based support levels.

Trade Plan:

HOLD QID with New Stop at $40.90

Quote from: AussieTrader on July 01, 2008, 04:36:52 AM
Update:
Right now I am unable to see any catalyst that will reverse this general weakness. In fact you could look at a stock like ATVI and conclude it might make a nice short as it has plenty of space to return back to longer term support.

ATVI down 7.4% yesterday, would have made a nice short entry.

Update:

Healthcare was the only sector in the green today and only by 0.08%. Everything took a tumble especially oil, energy, steel and coal related stocks all those which have been performing along with the ascent of oil and resources, but wait Oil hit an all time high yesterday, how come the equities related to it de-coupled so spectacularly at the same time? This could be a warning that oil will drive on and all equities including the leaders will fall over, or maybe that oil is about to fall over and equities after a capitulation sell-off will put in their recovery?
Another weird thing DUG the inverse oil and gas ETF +5% yesterday, USO the oil & gas tracking ETF only up 1.9% How can that be? If oil does start to fall over, keep DUG on the radar.

The NDX is as ugly as any other index, totally erasing the previous days rally attempt, our QID trade quite pretty by contrast. When QID passes $46, we will move the stop to at least breakeven, but for now no change to the trade plan.

Trade Plan:

HOLD QID with STOP at $40.90

Update:

The NDX continues under selling pressure. Last week was lighter on volume, but it was a shortened Holiday week so there is no conclusion to be drawn into hat. NDX is hovering around the 1800 zone which is the pivot lows from April. Probably expect some consolidation in this area before more downside action to test the March lows in the 1700 area.

Today I will adjust our trailing stop upwards as I stated in my last update that once QID passed $46 that would be the trigger to do this. I will place the stop at $41.80 (I know I said to breakeven beforel). Just now I want to leave it below $42 to keep it well and truly outside of any news based volatility. I am confident in further downside movement for NDX, but don't want to put this trade in danger prematurely by placing the stop at an artificial level.

Trade Plan:

HOLD QID with NEW STOP at $41.80

Update:

Volatility and undecided direction have characterized the last few days. The 1800 zone for NDX is a key area of technical support, once breached I fully expect a re-test of the 1700 zone. This zone is an area which has been in play in Oct 2006 as resistance, March 2007 as support, February and March 2008 as support. (see the attached weekly NDX chart). Looking forwards, July / August 2008 as support / resistance pivot seems extremely likley.

If and when NDX hits 1700 our QID position will be around $55 / $56.

No change to the trade plan at this stage.

Trade Plan:

HOLD QID with Stop at $41.80

Update:

NDX had a look below the previously discussed 1800 support zone on Friday, but managed to close just above at 1810, the lowest close since April 15th.

Where we are right now with many indexes is testing long term support, doing one of two things; about to put in a capitulation day spike down reverse and signal a bottom. Or test the area a few more times with small fast rallies that ultimately fail and continuation to the downside occurs. Now I don't know exactly what will happen, but I am thinking the second scenario is more likley than the first (at this stage any rate).

I would like to add more short index exposure to either S&P500 or the DJIA as our 1 position (QID) with this outcome is not enough exposure based on my expectations of current market direction.

No change to the trade plan for now I will wait for this '1800' battle to resolve before making a change.

Trade Plan:

HOLD QID with STOP at $41.80

Update:

The NDX had a huge range today as again we see the bull / bear battle around a key support area 1800. Ultimately NDX did close below this level (although only just) and left a doji candle which signals indecision as to ongoing direction.

I commented in the DXD thread about the SEC announcement relating to short selling rule changes. I'll leave the news article relating to it linked below;

http://online.wsj.com/article/SB121614248005255151.html?mod=djemalertNEWS

Today I will adjust our QID stop upwards in reaction to the current NDX pattern. The stop will be located at $42.30 which relates to being just outside the NDX highs of July 2nd of 1875.

Trade Plan:

HOLD QID with NEW STOP at $42.30

Update

A good day for the markets as many stocks participated in the rally. The NDX after closing below 1800 (just) Tuesday bolted out the gate Wednesday. INTC posted good sales results and gave positive guidance other semi players ALTR, XLNX also had relative positive outlooks. Financials got a bounce due to the SEC announcement to target naked short selling, oil going down gave all a reason to go up some.

So, could these past few days signal a bottom? Or are we just seeing a short term bear market rally (fast and furious) before failing at resistance.

Who knows? No one really, but we can all participate in the analysis, conversations and investigations. Our overall sentiment is positioned for continued downside action, but as you will see from the portfolio we do not have huge exposure to this thesis (likewise to the upside thesis).

Right now the market action very much favours nimble day trading get in on some intraday strength and grab x% profit before it snaps back again. Yesterday I was just about to start a position in either FRE or FNM, but I decided against due to the risk control of holding those plays overnight.

WIth the QID trade we are pretty much at breakeven, our stop is positioned such that if it were hit you woud be looking at decent bullish follow through more worthy of longer term sentiment change.

For now we will keep the stop in place.

Trade Plan:

HOLD QID with STOP at $42.30

Update:

Our market sentiment still remains bearish overall. NDX will open weakly today largely on the back of AAPL (after market close) giving relatively soft guidance for the coming quarter, although their sales and growth were excellant for the quarter just delivered, MAC is gaining  alot of market share ad the iPhone looks set to hit RIMM very hard. Longer term AAPL is a stock I want to hold, so one to watch to see how much pullback it gets.

I see NDX re-testing the 1800 area and QID re-testing $47.00

No change to the trade plan.

Trade Plan:

HOLD QID with Stop at $42.30

Update:

The NDX has been lagging some of the other indexes these last few days. It did indeed test the 1800 area and promptly rallied hard off it. I am getting the impression it is about to perhaps play catch up a bit. I wrote in the market discussion thread that I am getting a bit more bullish. Yesterday we had weak open strong close across a lot of stocks / indices, that again is bullish activity.

Today I will close our QID position. It has some profit (not a great deal) and I think that profit may well evaporate in the coming days. We can always get back positions so I am not concerned by that.

Trading Plan:

Sell QID at or around Market Open