Less than two weeks ago, PowerShares QQQ Trust ($QQQ), a popular ETF trading proxy for the Nasdaq 100 Index, was being monitored for potential swing trade short sale entry if it provided an ideal entry point. However, the November 1 bounce off its 200-day moving average was quite short-lived, and the Nasdaq plummeted to new lows just a few days later. But now that stocks attempted to catch a bid in the last session (November 9), it may lead to a more significant bounce off the lows this time around. If that happens, a plethora of overhead resistance levels, based on technical analysis, will be waiting to greet any rally attempt. This could provide short-term traders with new, low-risk short selling opportunities.
A basic tenet of technical analysis states that a prior level of support becomes the new level of resistance, after the support is broken. As such, swing traders could expect all the main stock market indexes (and their associated ETFs) to find resistance at their 20, 50, and 200-day moving averages. Since the Nasdaq 100 (and QQQ) is the index that has exhibited the most relative weakness on the way down, this might be the best index for a possible short sale in the near-term. An ideal short selling entry point is shown on the daily chart of QQQ below:
Most notably, QQQ may have a rough time initially getting back above its 200-day moving average (orange line). Just above that is near-term resistance of the 20-day exponential moving average (beige line), which is now sloping sharply lower. Within the next several days, that 20-day EMA is likely to cross down below the 200-day moving average, which would be further confirmation of a bearish trend reversal.
In theory, one might expect QQQ to neatly bounce into resistance of its 200-day moving average, then start to head back down. However, technical stock and ETF trading setups are rarely that clean-cut and orderly, especially on the short side. A more likely scenario is that QQQ rallies back to its 200-day moving average, then “overcuts” that resistance level by 1 to 2%. That would put QQQ in the area of its prior swing highs from early November. As annotated by the dashed horizontal line, this would also correspond to a probe above the 38.2% Fibonacci retracement level (measured from the September 19 high down to the November 8 low).
If QQQ manages to rally into that highlighted target area for potential short sale, it is not advisable to immediately and blindly sell short (or buy an inverse QQQ ETF). Rather, one would then need to wait for a proper signal to sell short, such as a bearish reversal candle or sharp opening gap down. Waiting for confirmation that near-term bullish momentum has abated lowers a trader’s risk AND enables one to have a more clearly defined stop price.
If traders are fortunate enough for QQQ to provide an ideal, low-risk short entry point, the first downside target would be the “swing low” of November 8. However, if bearish momentum takes QQQ back down to that low, there is a good chance the two-month-old downtrend will continue by forming another “lower low.” If that happens, increasing fear in the market could lead to a much sharper move to the downside. The next major support is shown on the longer-term weekly chart below:
Based on the setup explained above, it is obviously too early to consider selling short QQQ just yet. However, astute traders will be closely monitoring its price action for potential swing trading short sale entry if QQQ bounces to the target area, then provides an entry point by forming a bearish reversal candle or sharp opening gap lower. For now, this is just one potential scenario that could realistically happen.
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