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Weakness is software is day trader's short

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Software stocks as depicted by the GSTI Software Index (GSO.X) 128.32 -1.4% are showing some weakness for the second straight session and this has me profiling a bearish trade in the NASDAQ- 100 Trust (QQQ) $31.94 -0.83% at current level and earlier today in the market monitor at $32.16. As mentioned in the past, I like to monitor shares of Microsoft (NASDAQ:MSFT) $53.83 -0.33% and correlate that stock against the QQQ for both longer-term and short-term trades.

A quick look at the shorter-term 60-minute interval shows that Microsoft (MSFT) has started to drift lower and into a recent gap, thus a small area that may be void of near-term demand. We can correlate a similar gap in the QQQ.

With MSFT comprising a 10.77% weight in the QQQ, my thinking then becomes that further weakness and any "filling of the gap" in MSFt should have a negative impact on the QQQ, thus some conviction in shorting the QQQ with a 1/2 position trade at current levels, and then adding to the short with another 1/2 position on a confirming break in the QQQ at the $31.87 level. All along, monitoring both against each other as the trade unfolds.

NASDAQ-100 Trust / Microsoft Comparison - 60-minute interval

MSFT looks technically weaker than the QQQ, but this is in essence a "heads up" to potential QQQ weakness. Yes, there are 98 other stocks in the QQQ to worry about (Adelphia ADLAE is currently on a trading halt), but MSFT does have a major impact in the QQQs. Stops are outlined above and any strength in MSFT above the $55.56 level would most likely have the QQQ triggering a stop loss in the QQQ at $32.72. The "filling of the gaps" are the short-term traders target. Should MSFT reach its gap filling efforts first, then the trader short the QQQ becomes alert and monitors MSFT for any type of firming and strength. If a trader is following MSFT as its lead to future trading, then don't throw it out the window as the trade progresses.

Should MSFT firm and then start edging higher, the QQQ bear would then look to lock in short-term gains. While this is a short- term observation, a trade that swing-trades or is a longer-term type of trader can use some of these same observations and techniques in their trading scenarios and setups.

Other things we've noted today in the market monitor was that the GSO.X did break below yesterday's low. This was the "trigger" that then had us looking at MSFT and then making a tie in with the QQQ.

The markets move so darned fast. I now see the QQQ diving lower at $31.58 and really moving fast. I wish I could have gotten this info to day traders sooner if you weren't able to follow the market monitor. Hopefully you can still use in other trades in the future, both long and short!

Jeff Bailey
Senior Market Technician
Option Investor

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