In last night's market wrap at premierinvestor.net we talked in rather great detail about the NASDAQ-100 Trust (AMEX:QQQ) $27.03 -1.49% and the NASDAQ-100 Index (NDX.X) 1,086.81 -1.28% and tied in some of the NASDAQ-100 Bullish % ($BPNDX) observations. Our thinking was that the QQQ had a good chance of violating the September lows and we might get some type of reading on potential "capitulation."
Today, we've seen the QQQ break below the September lows of $27.20 and this has me now rolling down my retracement to the bearish vertical count level from the point and figure chart at $25. The resulting bar chart gives us some needed information on time frame and levels where bears can begin further assessing risk/reward from current levels.
NASDAQ-100 Trust (QQQ) Chart - Daily Interval
With the NASDAQ-100 Index (NDX.X) breaking the September lows, this will raise some eyebrows and bring into "question" just what lies ahead for the other often quoted market averages.
I've "overlaid" various inflection points of bullish % from the NASDAQ-100 Bullish % ($BPNDX) chart from www.stockcharts.com so that you can get a feel for how the MARKET views and manages risk. While there are undoubtedly lots of traders holding some QQQ puts or short the underlying QQQ, they should understand that bears carry the bulk of the risk. With a bearish vertical count of $25 (established back in January at the $38 sell signal) bears are most likely looking for a $2.10 gain from current levels, but need to manage risk to any upside.
By "dragging down" the lower end of retracement, the 80.9% retracement level at $28.45 can serve as a level of resistance and a trader can place a stop just above that level, say $28.55.
As you can see, even by doing that, risk/reward from current trading is about 50/50.
Last night we also mentioned we might look for volume in the QQQ above 150 million shares to perhaps signal some "capitulation" from bulls. We're a little more than half-way through the session here and the QQQ is second on the most active board with 822 million traded. In essence, seeing a little bit of sign that capitulation is taking place, but maybe not enough.
I've also "projected" the regression channel to the right of the chart and marked the "criss-cross" of lower end regression with the $25 retracement level. That come at around July 12th. While this isn't a "forecast" of when the QQQ trades $25 (I don't know that is will) and options trader can then use that type of information, weigh it against any QQQ put options in their account as it relates to time premium, and make a more prudent risk/reward type of decision in their account.
Traders can use similar techniques like that above in other sectors and even stocks they may be trading as it relates to point and figure vertical counts and levels of bullishness found in the sectors they are trading.