Why we sold before the market retreat

Selling power is a common theme in this swing trading column. This can also apply to the stock market indices. Looking at the Nasdaq 100 or a widely used proxy, QQQ, you can see the advantage.


A market call using QQQ

No matter how bad things are in the stock market, it’s helpful to remember that in just four days there could be a twist on the horizon. Just over a month ago, it looked like market indices were in trouble, trading weeks below their 50-day moving average by the time they hit rock bottom. (1).

As bad as it looked, just eight days later there was a follow-up day on October 14th (2). There was strong price movement, over 1%, with volume up from the previous day.

Our exposure at the time was light, so we added the ProShares Ultra QQQ ETF (QLD) until SwingTrader that day. This gives double the daily performance (up or down) of QQQ and can be a quick way to place a bigger bet on the market strength.

In addition to the sentencing, there was a follow-up day on QQQ just a few days later (3). It had all the criteria of a follow day, in price and volume, very early from our market signal.

Powerful selling

An important note about lead days; they don’t all work. But this one did on QQQ, even better than expected. We took our first third of the profit on the leveraged QQQ position with a gain of over 6% (4).

The reduction in our exposure to QQQ helped as there was some sideways action over the next few days and our position closed below the 5-day moving average (5).

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Holding the position paid off and QQQ pushed higher. But we took a third off for profit taking when we got 10% profit (6). Notably, this was also a downside reversal that looked like it was delaying QQQ.

When is it too much of a good thing?

It was easy to hold onto our double QQQ the following week. We consistently stayed above the 5-day moving average line, with gains piling up day after day.

After nine consecutive wins, QQQ was starting to look expanded (7). It approached 7% above its 50-day line, a level that has historically coincided with pullbacks. We took the rest of our position down 20% from our entry.

Selling in power sometimes means seeing profits happen without you. In this case it was only one day. Our decision seemed even better towards the end as QQQ looked like it marked another day of downtime (8).

When QQQ pulled back as expected, the leveraged ProShares ETF fell even more, 6.7% from the top (9). Selling in strength avoided the slump. If the pullback is temporary, as we expect, we could see another opportunity to play another market game in the future.

More details about past trades are available to SwingTrader subscribers and subjects. Free Trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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