Since the Brexit news was announced on June 23, stock traders and investors have been on a wild roller coaster ride.
The NASDAQ 100 Index plunged sharply for two days, promptly reversed, and has since erased nearly the entire news-driven decline.
But now that the NASDAQ is back in the vicinity of its pre-Brexit level, what happens next?
We firmly believe recent market action has created a pretty convincing case for near-term NASDAQ weakness over the next 1 to 2 weeks.
Accordingly, we see the potential for a rather profitable momentum trading opportunity in buying ProShares UltraPro Short QQQ ETF ($SQQQ), an inverse leveraged ETF that moves higher when NASDAQ 100 moves lower.
Continue reading to see our five fantastic reasons it may be an excellent time to buy $SQQQ, along with a clear, “no nonsense” technical plan for entering and exiting the trade.
Ready To React
As mentioned in our previous post, we always focus on reacting to market price action, rather than predicting it.
Nevertheless, when a high probability chart pattern falls on your lap, you need to be prepared with a clear plan of action to profit from that reaction when the time comes.
We will definitely share details of our action plan to buy $SQQQ in a bit, but let’s first review an annotated daily chart of $QQQ.
Although $SQQQ is the actual ETF we are stalking for swing trade entry, we prefer to focus our technical analysis on $QQQ instead because it is a well-known ETF proxy that more closely mirrors the price action of the NASDAQ 100 Index:
As promised, here are five excellent reasons it may be a great time to sell short $QQQ (through buying $SQQQ):
- Major prior resistance – Although $QQQ has recently recovered most of its post-Brexit losses, the NASDAQ 100 now starts the week dealing with resistance of its 50 and 200-day moving averages, as well as overhead resistance from its prior June 23 highs.
- Bearish volume pattern – Volume on each of the recovery days was lighter than volume of the two big down days. This points to institutional distribution, which is selling among hedge funds, mutual funds, and other financial institutions.
- Lower highs – $QQQ already formed a significant “lower high” in early June, which may indicate decreased bullish momentum on the intermediate to longer-term. This helps make the case that another “lower high” could be formed near current levels before stocks head back down.
- Too quick – Odds of stocks at least retracing a substantial portion of its recent losses in the near-term are favorable. Past experience has taught me that a sharp selloff followed by too quick of a complete recovery frequently leads to at least one quick move lower (“shakeout”) before price advances further.
- Positive reward-risk ratio – Before entering any new stock or ETF trade, we first determine how the potential profit (reward) compares to the potential loss (risk). Based on the entry, stop, and target prices detailed below, this setup offers a very favorable reward-risk ratio.
$SQQQ – A Better Way To Sell Short The NASDAQ
Thanks to the advent of inverse ETFs, which move higher as the underlying equity or index moves lower, you can now profit from a downward move in a stock or index without actually selling short.
Additionally, choosing a leveraged ETF as your trading vehicle to short the NASDAQ 100 offers the ability to get more “bang for your buck” on smaller trading accounts (be warned that leveraged ETFs are optimal only as only short-term trading vehicles because they may under-perform over longer holding periods).
Below is a daily chart of $SQQQ, which moves inversely to $QQQ and at three times the percentage ratio:
Looking at the chart above, notice we have labeled the trigger, target, and stop prices that comprise our plan for this momentum swing trade.
As with all swing trade setups, it is crucial to wait for the price action to confirm this analysis before entering the trade.
Therefore, you should wait until a bit of selling pressure in the NASDAQ 100 at least pushes $SQQQ above its July 1 high of $18.48 before entering a position (remember that weakness in $QQQ equates to strength in $SQQQ).
Our exact buy trigger price for $SQQQ is listed in The Wagner Daily, but the main point is to wait for the chart pattern to show a bit of price confirmation in the right direction before assuming any risk.
If $SQQQ moves above its July 1 high, momentum could easily lead to a 50% Fibonacci retracement of the range from the June 24 high to the July 1 low.
There is also a band of horizontal price resistance from May of 2016 around the 50% retracement level.
This initial profit target if $SQQQ triggers for buy entry equates to a price level around $20.
However, traders willing to hold a bit longer (more risk for greater potential gain) may even be rewarded for their patience with a full 100% retracement of the prior downward move (June 24 high is ~$22).
Again, remember this is merely a technical momentum trade setup, not a substantial bearish call on the overall market.
If $SQQQ rallies above its July 1 high, we do not want to see it dip back below that day’s low shortly thereafter.
However, a bit of volatility can be expected if bears re-enter the market, which means we need to give this ETF trade some “wiggle room” below its support level (July 1 low of $17.95).
If $QQQ was the ETF in question, we would set the stop about 1% above its July 1 high.
The equivalent stop in $SQQQ is roughly 3% below its July 1 low.
Again, subscribing members should note today’s newsletter for our exact stop price on this inverse ETF swing trade setup.
Be An Astute Trader
Although we have five solid reasons the NASDAQ 100 could head lower in the coming days, never forget the most important mantra for stock and ETF traders: Trade What You See, Not What You Think!
This means that the unexpected can and frequently does happen in the business of trading.
To protect yourself from unnecessary risk, don’t fall in love with any new trade idea at the detriment of not following your plan for managing the trade.
Above all, be patient and wait for the trade to generate a proper buy signal before entering the trade.
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