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Taliban and stock futures headed for higher ground

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Reports out of Afghanistan that Taliban forces are fleeing the cities of Kabul and Kandahar and running for hideouts in the mountains, has stock futures also headed for higher ground this morning.

S&P futures are trading higher by 13 points at 1,130 as market participants bid stocks higher in pre-market action. NASDAQ futures are bid higher by 37 points to 1,567 and Dow future are up 140 points at 9,665.

Fair value for the S&P 500 today is $1.10. HL Camp & Company has their computers set for program buying at $2.15 and set for program selling at $0.77. Fair value for the NASDAQ-100 today is $3.12.

What should I do with the QQQ?

If I were long the QQQ with 1/4 position at $31, I'm willing to let thing ride to a stop of $32. If you are comfortable with this risk, then you may want to do the same.

If I were long the QQQ with 1/2 position at $31, I'm looking to sell half of that position on a trade at $36.29. This would allow me to lock in a profit of $4.29 (roughly 13%) and keep some powder dry. I would then remain long 1/4 my trading discipline should I get further strength to $42, which would violate the bearish resistance trend by 3-boxes, just as it did in May of this year.

If I owned a full position in the QQQ, I would put a stop under 1/2 of that position soon under yesterday's low of $36.30 or look to sell 1/2 of the position long on strength at $42, then hold the remaining 1/2 position long until the bullish percent chart reached a "bear" stage market condition.

If I were a bear thinking of shorting a full position, I would only take a 1/4 to 1/2 position short at this time, take the rest of the money I might consider shorting on a full position and pay for a stress therapist visit, as I will most likely need one should the bullish percent reach the 98% level, which would be directly inverse the level of bearishness seen in late September.

Explanation

One reader wanted to know what he should be doing with the NASDAQ-100 trust (QQQ). To answer that, lets try and use the bullish percent data to assess who has the ball and what part of the field we're in. We're also going to try something new and attach a set of "rankings" like bullish, bearish and cautious as it relates to the bullish percent data. From there, we can make a more educated and informed decision based on current risk/reward.

We'll want to look back in time, not long ago as it relates to the institutional perspective to get a feel for the cycle we've been through. At the BEGINNING of each month, we'll make some calls or attach one of our "rankings" based on bullish percent data, then turn to the chart of the QQQ itself and make some buy/sell decisions.

Again... levels above 70% are considered "overbought" while levels below 30% are considered "oversold." The bullish percent tells us EVERYTHING about risk and supply/demand internals of the market. Ideally, a trader/investor wants to be buying at lower risk levels and selling higher risk levels.

It's imperative for traders to understand that you do not necessarily want to short an "oversold" level, unless you are disciplined with your stops. Again, the bullish percent tells us about RISK and not necessarily near-term price direction.

In May (red 5) of this year, we turned "cautious" on the QQQ as the bullish percent level was above the 70% level and in overbought territory. This was a time to be very cautious on any new bullish positions, and bearish positions (shorting/put options) could have been implemented by those willing to take some heat as MARKET bullishness was high and short-term rallies could create an unfavorable environment for shorting (much like we're in right now.)

NASDAQ-100 Bullish % Chart - 2% scale

As you can see I've circled the beginning entry for May (red 5) in pink for CAUTIOUS. The NASDAQ-100 internals were very bullish and 74% (74 of the 100 stocks) were on buy signals. Eventually, the bullish percent went "bear confirmed" at 64%, and by the beginning of June (red 6) a trader/investor was BEARISH. Again, I'm only circling the beginning of the months, so you can then tie them to the chart of the QQQ when we get to it.

Eventually, the NASDAQ-100 bullish percent reached the 30% level and became oversold below 30%. Then in early September (red 9) a major sell off was underway as the NASDAQ-100 became more oversold and most likely had smart bears becoming more CAUTIOUS with their shorting/put trades and looking to lock in gains on those stocks far from resistance. Eventually the bullish % reached the 2% level in late September then began reversing higher to "bull alert" status at 8%. Then, in early October (red A), traders/investors became more BULLISH as the internals had reversed from an extremely oversold condition not seen in years at 14% bullish (14 of 100 stocks now giving buy signals). In early November (red B) both bulls and bears needed to show CAUTION as the internals began weakening at 54% should have been snug under bullish trades. Bears were looking for shorts/puts that had rallied to a level of resistance where a stop was nearby should the markets resume their bullish tone. Opting for stocks where relative strength was turning negative vs. the broader S&P 500.

Now here we are, still in a relatively CAUTIOUS environment, but bullishness prevails. However, that bullishness prevails at an "overbought condition" and bulls need to be careful that they aren't just beginning to realize what an excellent buying opportunity was at hand in early October. The time period to concentrate on now is what took place in May of last year, near current levels of bullishness. Future resemblance to that time period, will give bulls plenty of "heads up" to potential internal weakness.

Let's now correlate the bullish percent chart and our CAUTIOUS, BEARISH and BULLISH states to that found on the QQQ point and figure chart.

NASDAQ-100 Trust (QQQ) - $1 box

I've colored the beginning of each month on the point and figure chart of the QQQ exactly as depicted on the bullish percent charts. You can really see how the "levels of risk" and CAUTIOUS, BEARISH, and BULLISH colors from the bullish percent data help a trader make some relatively sound decisions based on the point/figure charts.

In early May (red 5), the CAUTIOUS level and extremely high levels of bullishness found the QQQ at the $48 level. By early June (red 6) the bullish percent data was BEARISH and at a minimum would have had traders/investors raising stops to $44 and looking to sell into rallies (same goes for bears). In late August, the QQQ had given a "horrific" triple-bottom sell signal at $39 and bears may have been very aggressive with their shorting at that level based on the probabilities study from Professor Earl Davis at Purdue University. The in September, bears became CAUTIOUS near the $35 level and lowered stops on their trades to prevent against and "oversold" rally.

Then in early October (red A) bears became "bull alert" as the bullish percent charts began reversing higher from a 2% level to 14%, while the QQQ traded an all time low of $28!

Bulls were "bull alert" at 14% and may have began laying out plans to trade the QQQ bullish, but only with partial positions. One strategy would have been to be looking for a 3-box reversal higher at $31, then following with a stop, just under the recent low at $27.

In early November (red B) we entered the CAUTIOUS stage as the bullish percent chart did enter a "bear confirmed" status with a reading of 54% bullish (54 of 100 stocks showing buy signals). A trader long the QQQ would have been wise to have had a stop at $31, which would have been a sell signal on the QQQ chart.

Now here we are. Still in a CAUTIOUS yet bullish market environment for the QQQ holding 1/2, 1/4 or full position long. What to do? (see above).

Now, this was a long explanation, but I think it is more useful to know why I say the things I do, than for me to just say them.

One thing I would also do is now look at the S&P 500 bullish percent (BPSPX) and S&P 500 Index (SPX.X) and judge for yourself just how "overbought" the broader market is. Once you do that, you will hopefully see why you do NOT want to be shorting a full position in the QQQ at this time. In May, the S&P bullish % was at 74% and "overbought." Today however, the S&P 500 bullish percent is at 50% and could have a long way to go until it gets "overbought."

The NASDAQ-100 is ONLY 100 stocks and no competition for the broader bullishness that could prevail from the S&P 500. Be cognizant of this and trade the QQQ with CAUTION.

Jeff Bailey
Senior Market Technician
Option Investor

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