Subscribers are now cooking with gas and beginning to understand how a market maker may be looking at the equity markets. This morning in our 09:00 EST Update, we discussed the use of retracement along with our supply/demand charts. What subscribers found out is that they really didn't have a level of "support" to be using for locking in gains on swing trades, unless the NASDAQ were to plummet to the 1,900 level in the next couple of trading sessions. With the NASDAQ Composite taking out the most recent low, traders need "new levels" of support/resistance to be trading from, thus our technique of how to use the retracement bracket.
NASDAQ Composite (COMPX) Chart - 60-minute interval.
The 60-minute chart of the NASDAQ Composite (COMPX) in our 09:00 update was of little help to a bearish trader that is trying to figure out where a support level might be found. This is a problem encountered when indexes or stocks are trading at 52-week lows. Using our retracement technique, I can "fit" the 38.2% retracement bracket (remember, I'm just trying to identify levels that correlate with my chart and perhaps price objectives) at the 1,900 level we identified using our supply demand charts. What's left is a resistance level that correlates nicely with our chart at the 61.8% retracement level at 2,278. The 50% level now lies at 2,089 and this might be a level where market makers turn and begin providing liquidity for sellers, while covering some of their inventory short position initiated at higher levels. At the same time we can also now better understand levels that a market maker might be using to control his/her risk to our downside objective of 1,900. Traders that are short/put some technology stocks can use this exact technique to establish levels in the stocks they're trading. The more correlative the stock chart is to the NASDAQ Composite chart, the more CONFIDENCE you will have when making your buy/sell decision. Now that you understand levels, read the below information and understand that current risk/reward definitely favors the bulls at current levels, if you believe in bullish percent as an indicator. Remember that a market maker is only concerned with risk management while he/she makes a market in NASDAQ stocks.
Reprint from 09:30 EST Update 02/28/01
NASDAQ-100 is quantitatively "Oversold!"
The bullish percent indicator we talked about months ago is my favorite indicator for quantitatively giving me the needed information I like when assessing risk for a particular sector that I'm trading in. So many times we hear analysts say, "this group is way oversold" when in fact our bullish percent indicator tells us the group is actually overbought. What ends up happening? The group the analyst was talking about gets drilled to the downside further after many investors or traders had stepped in and risked their hard-earned money. Let's take a look at the bullish percent for the NASDAQ-100 and quantitatively measure the number of stocks in this index (100 stocks) and see what percentage of them are trading with a supply/demand "buy signal."
NASDAQ-100 Bullish Percent Chart - 2% scale.
The above chart might help traders that are trading the QQQ's currently. If you're short or have put this index, you might say you are currently short/put an index that is quantitatively "oversold" and is beginning to show a greater percentage of stocks in the group starting to generate "buy signals." A move above 30% from current levels would see the group getting more bullish. Traders will note the recent high in this indicator in January (the "red" 1 is beginning of January) was at 80% bullish which is quite "overbought." Now, it would have been tough to tell someone who bought the QQQ's back in September of 1999 that the NASDAQ-100 was overbought recently, but if they looked at the above bullish percent chart they might have understood what was about to happen and either wrote a covered call on their QQQ's or bought a protective put.