I hope you have all had a nice weekend so far.
I’m currently looking to short QQQ near 182.5 with a stop loss at 185.5. My target area is the support zone at 166-170. This is a risk reward of about 4-6 to 1, which is very good. A potential risk is that the stop loss is too close, so if you don’t want to get whipsawed, you can take a smaller position size and have a wider stop loss. The tradeoff is that your risk reward will be worse.
Also, to protect profits, I plan to drop my stop loss from 185.5 to 182.5 if QQQ drops below 178.
The main reasons for the short are as follows (in order of importance).
1: QQQ is approaching the top of trend line resistance, hinting that momentum will likely slow at that price as bulls get exhausted
2: There are massive RSI divergences on both the daily and weekly chart. These divergences come from the fact that the RSI and the price direction are not agreeing. Notice how the RSI is failing to get anywhere above 70, but in January, QQQ had an RSI reading of over 80.
In sum, while the index continues to make new highs, the RSI fails to make new highs. This hints at slowing buying interest.
3. Volume is significantly higher on the down days/weeks, hinting that the big fish, or the institutions, are selling. This is called “distribution.” From the weekly chart of QQQ above, you can see lots of these distribution weeks.
Also, MU and INTC have climbed a significant amount in the last week, but I am still waiting for a significant pullback to buy. At this point, I might just stay away since I believe the semiconductor sector is due for a correction (10%+ drop).
Bigfry's Blog 