Happy Marvelous Monday!
I help teach people to earn money trading options. It isn’t hard. I explain in easy-to-understand terms when I teach or write a book—like we are talking across the kitchen table.
The Nasdaq was down 3 days out of 5. The bearish days were much stronger than the bullish and on Friday the QQQs had the highest volume decline since last March. The Nasdaq may ease selling pressure with a quick temporary rise, but it appears as if it may continue to drop overall.
For updates on previous trades, please scroll down.
I am going to focus on the NASDAQ on Mondays and call it “QQQ Monday”. I will focus on QQQ which is the ETF covering companies traded within the NASDAQ Exchange Traded Fund.
For today’s discussion, we will be looking at Invesco QQQ Trust, symbol (QQQ).
Before analyzing QQQ’s charts, let’s take a closer look at the ETF and its services.
Invesco QQQ is an exchange-traded fund that tracks the Nasdaq-100 Index™. The Index includes the 100 largest non-financial companies listed on the Nasdaq based on market cap. These companies are often cut-edge tech stocks and trendier companies.
The image below is Friday’s price activity – at open.
This chart image is courtesy of FINVIZ.com a free website and gives a quick view of each day’s movement.
This is an image from Friday where it dropped throughout most of the day. The carpet shows a lot of red. Many of the symbols with 4 or 5 letters are included in the QQQs- AAPL, AMZN, GOOGL, etc.
Fibonacci Exponential Moving Averages (EMA)
Exponential moving averages (EMAs) reduce the lag seen in simple moving averages by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. We are applying 8, 21, and 55 weekly periods for our entry signals. EMAs differ from simple moving averages in that a given day’s EMA calculation depends on the EMA calculations for all the days prior to that day. You need far more than 10 days of data to calculate a reasonably accurate 10-day EMA.
There are three steps to calculating an exponential moving average (EMA). First, calculate the simple moving average for the initial EMA value. An exponential moving average (EMA) must start somewhere, so a simple moving average is used as the previous period’s EMA in the first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential moving average for each day between the initial EMA value and today, using the price, the multiplier, and the previous period’s EMA value.
Charting services like Stockcharts.com and your broker’s chart service figure these calculations for you.
As mentioned, entry signals are based on the use of 8, 21, and 55 weekly averages. (8, 21 and 55 are Fibonacci numbers which are a special sequence of numbers which are added together- 1+1= 2, 2+1=3, 2+3=5, 5+3= 8, etc. 13, 21, 34, 55, 89, 144, 233, 377, 600… As mentioned, we are zeroing in on 8 EMA (short term), 21 EMA (medium term) and 55 EMA (long term).
Let’s See Why This Signal Potentially Offers Potential Trade Info
Each candle on the chart represents price movement over a 5-day (week) period. QQQ is apt to continue to drop or flatten out if the EMAs curl and down and going lower. In March and May this year, price pulled back toward the 21 EMA and then, bounced up off that area. The last 6 weeks price have been heading up, as seen above, but have switched between red and black every other week with the end result being flat until the last two weeks when they candles rolled over and were large and red. It seems tired and ready for a pullback.
As long as the 8 EMA remains above the 21 EMA and the 8 and 21 EMA both remain above the 55 EMA, said to be in uptrending order, its current uptrend will remain intact, and price will continue to rise or go flat. With this week downward move, we will likely have a indecisive or bearish final quarter of 2021. We have now had a candle drop and have a weekly close below the 8 EMA, that is a breech and then, we need to adjust our outlook to more bearish expectation We will keep an eye on QQQ’s movement over the course of the couple weeks.
Potential Profit Play for QQQ
Last week, I thought the QQQs and the market as a whole looked bearish, it closed down for the week. If Monday continues to drop from its bearish close on Friday, a Put trade could be considered. Price did drop below the 8 EMA but there is no way of knowing what will happen Monday with a weekend to pause. There may be a small upward release of pressure and then have the down move continue.
Options often offer a smaller overall investment, covering more shares of stock and potential for greater profits, as well as making money when the price of a stock drops.
If price continues to drop on Monday or after a short upward release of pressure and then drops, a Put trade could be considered.
As a comparison, if you bought 2 shares of QQQ stock for 383 per share, you would invest $766. If it dropped to $370, you would take a loss of $13 per share or $26 or a loss of 3%.
Let’s compare to an option trade. If you selected a 370 strike Put option and paid a premium of $5.50 for the Dec 17th (Dec 21) expiration. If price dropped from 383 to 370, losing $13 dollars in the stock’s price, the put premium is apt to go up about $10. Premium of $5.50 plus $10 = $15.50 or a profit of $10 per share or $1,000 for the 100-share contract. That is a profit of 182%
Remember, you can take profit anywhere along the line, you don’t have to wait for the expiration date to sell. It is often wise to take profit when it is earned, especially in a volatile market.
If price drops below thWendy Kirkland support line, it can be wise to sell to reduce loss. As the expiration date nears, the premium will lose an increasing time value.
EMAs and line crosses are at the heart of most of my strategies. Many strategies come with a weekly newsletter listing numerous potential trade candidates.
I love teaching and sharing. It is my “thing”.
PS-I have created this daily letter to help you see the great potential you can realize by trading options. Being able to recognize these set ups are a key first step in generating wealth with options. Once you are in a trade, there is a huge range of tools that can be used to manage the many possibilities that can present themselves. If you are interested in learning how to apply these tools and increase the potential of each trade click here.