Hi everyone, I hope all is well. The indexes are signaling to me that we are ready for a larger pullback. If we don’t get a larger pullback here, I expect the exact opposite to happen – a very strong upward breakout. If I was playing options here, I would bet that volatility will increase significantly, meaning I would be buying options.
We had a significant down day in QQQ this week, signaling that we will move down more next week. If QQQ has a daily close above 305, I think the current pullback will end. Otherwise, I think we work our way down to 280.
QQQ daily chart below:
If we go short here, we would risk about 3-5 points up (hard stop loss at 307, mental stop is a close above 305) and the reward is a little over 20 points down (profit exit at 280). That’s a risk reward of at least 4 to 1 which is really good. Most of the time we will be wrong here, but we only need to be right 20% of the time to break even (since the risk reward is 4 to 1).
I think that QQQ will drag the market (SPY) down if it drops, which is why I discussed my outlook on QQQ this week.
I’ll keep you updated during the week if any developments cause me to change my mind about the direction of the market.