Why More And More Traders Are Trading The QQQs, Part III

In the beginning of our look into the Nasdaq 100 Tracking Stock (QQQ | Quote | Chart | News | PowerRating), Part 1 led us into what the Qs are, and why we should incorporate them into our trading. In Part II we examined basic strategies for trading this instrument. In this final installment of our series, we will take a more advanced look at some of the methods TradingMarkets.com contributors Kevin Haggerty, Carolyn Lueck, and the guru of the Qs, Don Miller, employ in their own trading, using this versatile issue.


Kevin Haggerty

Here is a trading strategy that Kevin Haggerty uses in the QQQs by following the action of the Nasdaq 100 index.

Prices often pull back or "retrace" a portion of their previous trend before resuming that trend. Retracements are a fairly simple concept. You measure a trend from a significant low to a significant high and take percentages of that move for likely support and/or reversal levels. It’s likened to the phrase “two steps forward and one step back.” If a market did exactly this, then it would be a 50% retracement. The most commonly used retracement levels are 38.2%, 50% and 61.8%. Referring to Figure 1, notice that the retracement levels for the move from (a) to (b) are shown on the right side of the chart. Obviously, if the market comes all the way back to (c) then 100% of the prior move has been retraced.

Using the daily chart of the Nasdaq 100 index (NDX | Quote | Chart | News | PowerRating), Kevin notes that the price action has the index rallying off the January low of 2087 to the high in the same month of 2772. After that, the index proceeds to retrace a portion of that move and return back towards the .618 Fibonacci retracement of that move higher.

Now that Kevin has gotten the bigger picture from the daily chart, on the morning of Feb. 7 he is scrolling his intraday chart of the Nasdaq 100 Tracking Stock (QQQ | Quote | Chart | News | PowerRating) for an entry point. The Nasdaq 100 Index is not a tradable instrument, so to trade its action one must utilize either the QQQs or the Nasdaq 100 futures contract. Sure enough, on the five-minute chart, the index sells off and comes down to kiss this .618 retracement.

Kevin is now executing his trade in the QQQs after the stock makes a 1-2-3 bottoming pattern, where the issue creates three swing points. The first swingpoint is the move down to the .618 retracement (1), number two is the move higher (2), and the last swing occurs at (3).

The stock trades up more than 1 point from the entry before Kevin's trailing stop is hit, resulting in a profitable trade.


Carolyn Lueck

In this example, Carolyn Lueck shows me how she switches gears, shorting the Qs and then turning around and going long. 

Carolyn: "Initially I was short in a trade, based upon resistance at the area where the Nasdaq failed back in early March.

"So I got a nice trade on a pretty large short position in the Qs that I covered on May 29. I then switched gears and took a long position in the afternoon the following day. If you look at the 60-minute chart back on May 15 to 16, you will see a small gap down on the open of the 16th, and the low in the 44 area, just before the index started to break out to the upside. On the afternoon of the 30th, for about three and a half hours it kept trying to push down below that lower 44 area, and we stabilized there. Things started to move up and my MACD started to give a buy signal, so I got into my long position late in the afternoon at 44.25.

"I held it through the open, and I was looking to get out at a target somewhere between 46 and 47, and just make a quick day trade. My thinking at the time of the trade was that the sentiment in the market has changed pretty dramatically from the euphoria of just last week and it changed rather quickly, which makes me very nervous. I was looking for a pullback, I was definitely looking for a buyable entry in the market, and I think I got that on the 31st. But I just didn't see it carrying it as high as it may have last week with the euphoria, because everything has kind of ground to a halt here. I think all the bad news, that has always been here, is finally being understood a little more. I exited at 45.45, short of my original projected target, when the market weakened later in the trading session."


Don Miller

Don Miller was kind enough to walk me through a contra-trend trade, taking advantage of a brief pullback in an intraday downtrend to make a nice profit on the long side.

Don: "Basically, the main way I trade is to use the 5- and 15-period moving average for support and resistance points in the QQQs on multiple time frames. I am always watching those MAs on a 1-minute, 3-minute and 13-minute basis. One of the things that I look for are oscillations or reversals in trends. Three out of the last four days, we sold off hard, and at some point, you come to a point in the trend where probability is starting to shift more toward a bounce. Trends do not just go on forever, and we are aware of that. So, one of the things I was doing this morning, as I was also doing late yesterday, was looking for any sign, that we would bounce. Yesterday's decline came on still relatively modest volume, and so I felt that at some point the probability was there to cause a turn. Even though I often use a 1-minute chart, I have actually shifted a little bit, due to the extent of the decline, to a 3-minute chart. The trend has been, so, so strong. We have been selling down on 13-minute charts, 30-minute charts, you name it. And so a 3-minute turn is actually a pretty early entry, and yet I feel that someone can still profit from it.

"So moving along, this morning continued to sell down further, and I was basically looking for one thing. I was looking for a stabilization on the 3-minute trend. For me, stabilization is defined when the 5-period MA crosses the 15-period MA in the direction of the trade, or in the direction I am looking for. And indeed that did happen this morning, right at about 9:55 a.m. we did get a cross, so to me that signaled somewhat of an 'all clear' for the moment and I took that as an entry.

"Now, I recognized that, longer-term, we are still in a downtrend, so this is trading a mini trend in the context of a larger contra-trend. So what I was using as my exit point, and scaling out of the trade as it is approaching that exit point, was the 15-period MA on the 13-minute chart, since it is clearly still in a downtrend. The 15-period MA on that chart was showing support for that existing trend, or resistance on my long trade.

"I like to get in early, so what I did is, as the QQQs were climbing, being very, very conscious of the longer-term downtrend made sure that I got out of the trade as it was approaching that natural resistance point. In this case, I got filled at my entry at 40.40, and I just scaled out as it climbed. I scaled out first at 40.64, then at 40.80, then 40.86 and finally sold my last piece of the position at 40.98. This type of exit is very typical of how I trade.

"Some people, like Alexander Elder for example, will say that you should make sure all your time periods are moving in the same direction. I say, well, not necessarily, as long as you recognize that you are trading a mini trend, if you want to call it that, that is just a retracement of a larger-term trend heading the other way. Over the years a good number of my trades reflect that sort of strategy, and yes, it does require focus and knowing when you need to be out. So that is what happened in this trade, and boy, I caught almost .60 on the QQQs, with very good share size. I was waiting for it, and it showed up.

"I know that a lot of people will not do this. They feel 'you have got to trade with the larger trend.' The truth is, either way you can get into trouble unless your entries are well timed. You can trade with the trend late and get killed just as easily as trading against the trend. At some point the trend just gets so over extended that, at a minimum, you are going to flatten out and oscillate a little bit. That's what happened here."

Breakouts Over A Triple Top

Price action which often will signal the beginning of a very powerful move is a triple top. Whatever the time frame, daily, hourly or on the five-minute bars -- you don't often see a quadruple top. Two things can occur at this juncture, you will get a breakdown and fail if it cannot overcome the resistance level, or the stock will rally and take out the triple top. The tops do not have to be horizontal either. This technique works equally well on an angular basis, as it did in this example from Tuesday, July 17.

Here the Qs have been in a two-and-a-half hour downtrend with three lower swing highs, and things are beginning to look like gloom and doom is descending. However, when the triple top is offset to the upside, look out.

In closing, these are some of the myriad of methods and strategies that market warriors carry into battle every day in this arena. Experiment on paper and see if you are on the right track, making use of the techniques that have been profiled here. In addition, make sure you read Don Miller's commentary every day, to get a better feel for the movement of the Qs on an intraday timeframe.

Thanks for joining me in this series.

Duke

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