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Why We Are Waiting For The Nasdaq 100 To Bounce Into Resistance ($QQQ)

|Includes:PSQ, QID, QLD, PowerShares QQQ Trust ETF (QQQ)

Given that the Nasdaq 100 Index ($NDX) has been drifting lower for the past six days (including the flat closing price on October 12), the index may be becoming a bit "oversold" in the near-term. We hesitate to use the term "oversold" because it's a relative term; stocks and ETFs can frequently become even much more "oversold" before eventually bouncing. Therefore, we use the term loosely. Nevertheless, odds now technically favor at least a short-term bounce off the lows in the coming week, which could create a new opportunity to short sell $QQQ (or buy an inversely correlated "short ETF") for swing traders who missed the initial sell-off and breakdown in the Nasdaq.

Because of the anticipated near-term bounce, we have tightened the protective stop on our current ETF position in the inversely correlated ProShares Short QQQ ($PSQ), which is presently showing an unrealized gain since our October 9 entry (we bought PSQ, rather than selling short QQQ, so that subscribers with non-marginable cash accounts could still participate). Going into today, our new stop for PSQ has been moved to just below last Friday's (October 12) intraday low ($25.09). This new stop price enables us to capture even more gains if the Nasdaq 100 fails to bounce today and continues extending its losing streak. However, with this new, tightened stop price, we will still quickly lock in a gain on our ETF trade, even if the Nasdaq suddenly bounces sharply higher or a "short squeeze" sets in.

Over the next week or two, we would ideally like to see a substantial bounce in the Nasdaq 100 Index up to new technical resistance of its 50-day moving average (remember that a prior level of support becomes the new level of resistance after the support is broken). Further, the 20-day exponential moving average (beige line on the chart below) is now converging with and is poised to cross below the 50-day moving average (teal line), thereby creating additional resistance.

If the Nasdaq 100 bounces into convergence of the 20 and 50-day moving average and stalls, we would then have a low-risk re-entry point for selling short the Nasdaq 100 Index, along with a much more positive reward-risk ratio, in anticipation of the index making another leg down. The ideal bounce for the Nasdaq 100 is annotated below on the daily chart of PowerShares QQQ trust ($QQQ), a very popular ETF proxy for the Nasdaq 100 Index:

(click to enlarge)$QQQ ideal bounce into resistanceClick to enlarge

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Stocks: QQQ, QID, QLD, PSQ