This morning we received several e-mails from subscribers that benefited lately from our retracement technique that come to be known as "fitting." No, the e-mail wasn't from subscribers that shorted shares of Rational Software (NASDAQ:RATL), but from those that didn't buy it or cut out early after our write up in the 11:30 EST update. We thought we had identified what could have been the upper end of a trading range in the stock near $30. Even though the stock had just broken a triple-top and broken above the bearish resistance line, the stock wasn't moving higher like we thought it should. That's when we went to work with the bar charts and used the retracement tool to perhaps uncover the culprit. Subscribers can go back to the 06/28/01 archive at 01:30 to see what we were doing in RATL at that time.
Now lets take a look at the QQQ. If market makers are using this technique in RATL, then perhaps they're using it in other stocks that help make up the QQQ and the NASDAQ-100. We can also pull together some of the information we're getting from the NASDAQ- 100 bullish percent data from this morning to help understand just how we might be wanting to trade the QQQ right now.
If a subscriber were holding some long positions in four-lettered stocks with the NASDAQ-100 bullish percent in "bear alert" status, then it might make sense to be looking at the QQQ as a hedge. If I were long 5 NASDAQ stocks, then perhaps a low risk trade in the QQQ would make sense. Especially if it were at the upper end of what looks to be a potential level of resistance. Check out the "fitted" retracement bracket on the QQQ and see if you agree.
NASDAQ-100 Index Tracking Stocks (QQQ) - last five months
If I "fit" the 38.2% retracement bracket to the recent low of the QQQ all of a sudden things start to clear up a bit. Notice how the resulting 50% retracement does indeed look to have been a level back in April and May where the QQQ found support. Then perhaps it makes some sense that the recent pullback to $41.25 came just at the opportune time when the NASDAQ-100 bullish percent did reach an oversold level when it dipped below the 30% level on its chart (this morning's 09:00 EST Update). Now, if we understand the index risk of 50%, I can then perhaps think that a short/put play in the QQQ is a relative decent trade at current levels as long as I'm using a stop just above the recent high of $46.52.
If you're perhaps thinking like a market maker and look at your account. If you're account is full of NASDAQ stocks (inventory for a market maker) and they're just not moving higher, then perhaps a market maker is simply looking to hedge his/her inventory currently as sector risk (from bullish percent) is 50/50. A trader that is thinking this way might then surmise that a reversal in the bullish percent lower, would come with a move toward the 50% retracement bracket from above at $43.60 and a retest of the bullish percent lows (from 09:00 Update) at 26% might have the QQQ once again trading the $41.25 level. Conversely, a move higher in the QQQ above the recent relative high of $46.52 may also have the bullish percent chart trading the 52% bullish level and then have the bullish percent chart indicating "bull confirmed."
I would NOT want to be short the QQQ when the bullish percent indicator turned "bull confirmed," but if you look at the QQQ right now on a risk/reward basis and bring in the bullish percent data, you might see how it currently favors a bearish trade especially if you've been picking away at a few longs here and there with 1/2 position trade sizes.
Remember that today's trading session is shortened due to the 4th of July holiday. Trading ends at 01:00 PM EST. Have a great holiday and don't forget to wear your seatbelt!