Perfect chart reading - with hindsight!
Remember Jan 3 when the Feds made the surprise 50 basis points cut on interest rates? That was the day QQQ reversed from its downtrend to a 52 week low of $52.15. The subsequent rally lasted for the next 14 trading days to a high of $69.12 on Jan24, after which the profit-taking started. As a swing trader, the ideal day to go long was on Jan. 8, the 3rd trading day of the rally when QQQ had a mini pull-back.
Would chart reading have signalled us to go long that day? Maybe, and maybe not. There were two possible scenarios then:
(1) Continuation of the downtrend
(2) Continuation of the rally.
There was a clue for scenario 2, since on that day there was a bullish "hammer" candlestick.
It could be said that a skilled TA practitioner could have taken a bet after confirmation of the hammer a couple of days later and go long on a swing trade. The market fundamentals then supported a bullish sentiment - a keen Greenspan with more rate cuts to come.
A trader who missed the Jan 6th opportunity to go long would be left watching QQQ rising day after day, zooming up first the 20 ema line, then the downtrend line, setting up the first sign for a potential Vic123 reversal pattern. This potential was enhanced by the reverse head and shoulders pattern formed from mid December to mid January. The low line of the Vic123 pattern was $52.15.
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The next consideration was where to go "short" after the rally from the $52.15 low was finished. The market tone then was generally bullish due to anticipation of further rate cuts with the Fed meeting on Feb. 13th ahead. So, going short under those circumstances would contain an extraordinary risk. However, a skilled TA practitioner could have gone short on the "lower high" 5 trading days after $69.12 high (Jan 31).
If the opportunity to short on Jan. 31 was missed, the next look out was to go long. At this time, the low and high paramenters of a potential Vic123 pattern was known - $69.12 high, $52.15 low. Question then was "where will the bounce take place?". 33%, 50%, 66% on the Fibonacci ruler?
There were two possible scenarios: (1)fall from a rising wedge to continuation of the primary downtrend (2) a higher low setting up a 123 trend reversal.
The bounce from a higher low didn't happen. The market sentiment reversed from optimism of further rate cuts to fear of earnings deterioration from a slowing economy. Even the Feb. 13th rate cut didn't help. The market sentiment etched onto the negative zone. One after another, tech companies announced lower earnings outlook, or a "lack of visibility". Uncertainty and lower earnings outlook are never positive for the market. Day after day, we got bad news on the earnings outlook from giant companies the likes of LU, JDSU, INTC, DELL, and NT. And of course, we had help from the analysts, who were tripping over themselves to slash down the ratings and price targets, perhaps, motivated by guilt from their "strong buy" recommendations while the stocks were trading at those stratospheric levels.
Today is no different... more darkness and no daylight in sight. BEAS didn't meet whisper numbers, SUNW made an about-face forecast two weeks ago and slashed earnings outlook from 30% to 10% (can you blame Nortel?? ...maybe it does exist - immediate collapse of tech spending), and MOT gave another indication of even worse earnings outlook.
On Wednesday this week (Feb. 21), the rising wedge scenario became a reality as QQQ penetrated down the previous low of $52.15.
Where is next for a swing trade on QQQ?
(1) Where will QQQ find support?
(2) Would it be a reasonable trade to short QQQ on the next bounce?
(3) Just short QQQ anytime we feel like it, since it'll be a long way before there is daylight in sight.
(4) Stay away (oohh, but this is no fun!)
(5) Dunno.
Other scenarios? |
