Newsletter-08-12-07

Last week I asked - Why not play the Short side during these down months?
That where the QID comes in handy.

I said last week I would provide more detail as to why I chose to play the QID. First, for those that do not know, the QID is the Proshares Ultra short for the NASDAQ composite not the QQQQ ETF as I incorrectly stated last week. The QID mirrors the inverse of the NASDAQ composite. So when the Nasdaq is going down the QID goes up. That means you can actually short the Nasdaq by going long on the QID.

(No, need to go back and read the previous newletter as I included all the useful information in this one)

The comparison chart below shows the relationship of the QID and the Nasdaq composite based on Worden Brothers’ Telechart software. I have use the Telechart software for over 10 years and I think it is the best software for scanning for possible trades. It also provides very accurate End of day price data.

Figure 1 Comparison between QID and Nasdaq composite

Before entering a trade you should have a plan. You should know where you are willing to enter, your worst case exit and one or more targets. I prefer to identify 3 targets that way when the trade exceeds my first target I do not need to scramble trying to figure out what I do next. If it takes out the first target on good volume that is with 90% or higher of the 90 day average volume then I let it run to target #2 or until the volume starts to dry up. I use the same logic if the trade runs past Target #2. Of course, I will exit at any point in the trade if it shows a sell signal or other weakness.

 One of the things I do before trading any stock is to determine previous price pivots zones. These previous reversal zones provide support and resistance zones which almost always act as resistance and support once the reversal has occurred. They provide possible worst exit and multiple target areas. Thing to remember is these are not precise price points but rather they are price zones. On the chart below I have marked the QID support and resistance lines for QID in red with blue extensions.

Figure 2 QID Support/Resistance

 Determining Risk Using the support/resistance

By creating a simple spreadsheet I am able to calculate the Reward to Risk Ratio for each potential trade. Using the following formula

So base on the support/resistance from the above chart I show in the spreadsheet and acceptable Reward-to-Risk Ratio.

Table 1 Reward to Risk Calculator

Several things prompted me to make the first QID trade as shown on the chart below.

1.First, was the Candlestick Morning Star pattern on 7/18 - 7/20 

2.  QID was at an All Time Low

3.    I did not jump right. Rather, I waited for a bullish sign which was the opening gap on 7/24

4.    I, also, noticed the up volume was exceeding the down volume on the Morning Star

5.    The Stochastic 12.3.3 had been in the oversold area for nearly the whole month of July

6.    Plus, my AdvancedGet showed the QID had possibly reached the Completion of the 5 wave down pattern and the QQQQ was testing the 6 year high from May 2001

 

Figure 3 QID Trades

As I stated in last weeks’ newsletter, I entered a trade on July 24th at 42.28 and closed it out on August 1st at 46.08. Why did I exit the trade:
1.    It hit my first target of 45.60
2.    It did it on less volume than the 2 previous up days had
3.    It came very close (47.22) to testing Target #2 (47.44) and then was giving back to much (20%) of my profit.

Then I asked, So what next?

If we believe the Nasdaq February high will be taken out 
 I stated, “It looks to me like all 3 indices are currently testing old support/resistance areas. So we should see some amount of rally over the next few days. Then the downtrend should continue.”
What happen was we got some really wild swings in the markets. I’m sure you have heard all the mortgage stories, the failures, and the French banks stopping payments. According to "The Associated Press" and Jeannine Aversa the Federal Reserve pumped $62 billion into the Markets on Thursday and Friday. This caused an unusual rally. So now we have to wait for Monday to see how it is going to play out. 
 If you truly believe, as I do, that we will take out those February 2007 high on the down move then doesn't it make sense that the QID should take out the February lows and possibly the March highs. That should give us targets in the $53 to $57 area.

As I wrote last week, I was looking for a re-enter point into the QID. In last week’s newsletter I track each day of the previous week so I won’t bore you with that information again. I stated that I was looking for 3 rally days of the market before getting back in. That did not happen the previous week but did occur this past week.
I re-enter the QID trade on Thursday and the trade is still open. Table 1 Reward to Risk Calculator above shows the actual entry point and the possible exit points. I re-entered this trade mostly due to my belief the market are still heading down and the buy signal of 3 consecutive down days followed by a gap open.
As I mentioned last week there are many other ETF’s you can check out for playing the short side of the market by going long on the Ultra-short ETF’s. The ones with over 100K shares per day traded are QID, DOG, DUG, SDS, TWM, SRS, MZZ, SKF, DXD, SH. None of these ETF’s is Optionable.
These short-term swing trades in highly volatile markets can be very risky and result in above average losses. So one needs to be highly disciplined and stick to your rules. Keep your stop-loss exits tight. Above all else don’t get greedy. Take the short-term profit or loss and move on.

Up-coming events:
 
At TradingOurWay, we are currently planning a Financial Seminar at Sea cruise departing out of FT. Lauderdale on April 12th, 2008. It’s an 8 day cruise to the Panama Canal with 4 sea days of classroom activities. We would love to have everyone join us! Complete details can be found at Tradingourway.
 
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Update 8/14/07 15:53:13