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GSTI Software Index broke 119!

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The last couple of days, traders were watching the GSO.X to perhaps get a grasp what was taking place in a "weak" sector of technology. The reason we were monitoring things here was to get a feel of how the MARKET was acting. We knew there were very few profits in the group and any rise in this index was either short- covering or bulls averaging down. We wanted to monitor the 219 level and figured any break below that level would be a signal that bearish traders were either through covering for a while or there just wasn't enough bullish money to drive things higher. I also felt that since this group was "weak" it would be the first technology Index to signal weakness for technology. This morning the GSO.X broke below 219, giving me one alert that the "tail of the snake" was starting to move backward. With that in mind, I figured that the body of the snake and even the head would probably see a pullback too. With the GSO.X down 5.23% and the NASDAQ Composite down 2.3% you can see how my/our analysis was correct. Traders that understand how a weak group is a great group to monitor have an advantage over those that just look at a broader market indicator. Now we look for any type of strength in the GSO.X to confirm any type of upward move in stocks. I'm also watching Bond YIELDS which are starting to rise and this had me alert to a POTENTIAL reversal in stocks.

30-year Treasury YIELD Chart - 60-minute interval.

The YIELD on the 30-year (TYX.X) has recovered somewhat and all we want to do here is make sure that this very short-term trend doesn't turn into a longer-term trend, especially if we are short the QQQ's. It would take a move back above 53.19 and even the 50-period MA to have be starting to think that stocks could stage a turnaround. However, if you did some shorting this morning you are alert. The key to trading is being alert and managing your trade. If you're profitable in a trade and uncertain about where things are going, I always recommend taking the profit off the table and moving to the sidelines.

Questions from readers

QQQ Put -

Hi Jeff:

Quick question for you when you have time. This morning at 09:30 EST on Indexskybox.com you suggested shorting/putting the QQQ's on a break below $49.36. Chart example was the 60-min. chart. QQQ's have broken the level and the MACD appears to be rolling over on the 60-min chart. Should you wait until the full 60-min period is over and see if it still looks weak, or short as soon as it breaks? I know you can't give individual advice. I am just trying to learn how to get better entry points. I seem to be right in direction, but I am having a hard time with entry points and any points you can give would be greatly appreciated.

Thank you
Subscriber

Response:

Based on the 60-min chart, I would NOT wait for an hour to see if there is continued weakness. If there was continued weakness it would probably have the QQQ's trading lower than my action point of $49.36. Traders must understand that they need an up-tick (someone to buy the security from you as we can't sell the bid to get short) and the trade will probably work against you (move higher) after your short. This makes sense as you needed to see some buying to get short in the first place. However, I need some "level" that I take action at. I wanted to take action at $49.34, not at $49 and not at $48. If the QQQ's had gapped down at today's open say at $47 I must immediately see if the trade made sense. If my stop was at $50.75 like I outlined in the trade, then my risk/reward becomes much different. Today we were using the retracement bracket (like we have before) to help ascertain where a buyer might become a seller. If bond YIELDS were lower and not showing any signs of recovery and the QQQ's hit my entry point of $49.34 I'd have taken it. If a 60-minute chart isn't of use, try using a 30-minute or 10-minute interval chart to help you with your entry points and timing.

NASDAQ-100 Index Tracking Stock (QQQ) - 30-minute interval

An example of how the subscriber might better use a different interval like the 30-minute interval is above. The subscriber may have shorted/put the QQQ's right when this security broke below the $49.36 level. I outlined the trade on the 60-minute interval just because it displays more historical data (twice as much as the 30-minute interval). Shorter-term traders use 30- minute, 15-minute, 10-minute and 2-minute intervals. An aggressive trader would probably be lowering his/her stop to break-even and protect themselves against a loss. You can see from the above chart that a rally to $46.365 is not out of the question. If I'm trading 1,000 shares a whack or 10 put contracts on the QQQ's I'll take $1 move in the security here and there every day and build my account. Those traders that are trading smaller size can also look for other targets and measure those targets against their trade size to see if the trade makes sense. I've outlined multiple targets above. If your trading smaller sizes like 100 shares, you need more than a $1 move down for today's trade to make sense.

Another comment:

Jeff:

Today I read your update about buying QQQ puts. I waited until the NASDAQ broke 2,200 support, then I bought some puts (QQQ MAR50 puts). At that time I saw TRIN index. Although OEX and NASDAQ were in negative territory, TRIN index was 0.8. It showed be that decline in market was not enough "strength" and there is no volume for decliners. Am I right? What is the real meaning of TRIN below 1 when market is dropping? Is it wise to wait until TRIN exceeds 1 and then buy puts? After 2 hours of purchasing QQQ puts, Now QQQ have climbed and my puts have declined.

Reply:

If the TRIN is an indicator you use with success, then only take my commentary as an "alert" to trade the QQQ's. If you are interpreting the TRIN as described, you might at least say there is some selling pressure, but not a lot. Therefor I should not be expecting a plummet to the $45 level and a more gradual decline in the QQQ's. I will tell everyone here, I am more of a "levels" trader. I can use 50-different indicators and many of them tell me different things. Eventually I will be so confused with what all the different indicators are telling me that I will either do nothing, or panic out of every trade I initiate. I like to keep things as clear as possible and simply trade levels. I personally don't use the TRIN in my own analysis here, simply because it ads more confusion than I seem to bring to some readers (Dan would agree with me on this.) I'm not saying not to use other indicators, but just use the ones you understand and those that have provided success to you over time. I like to say "the trend is your friend, trade it." If you like to say, "the TRIN is your friend, trade it" then do that and just use my commentary as an alert to check your trading discipline against.

Jeff Bailey
Staff Analyst
www.indexskybox.com
www.OptionInvestor.com

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