Monday, August 16th, 2021
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.
Last week, the Nasdaq was up 3 days out of 5. During the week, it did not reach new highs and the up days closed lower than they opened. The Nasdaq is often a strong leader of the indices but not this week. The Dow and S&P outperformed the Nasdaq. The end result was the Nasdaq went flat. We can do little more than to evaluate week-to-week.
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.
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 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).
The details below show why this trade signal could produce a profitable trade opportunity.
Let’s See Why This Signal Potentially Offers An Awesome Trade
Each candle on the chart represents price movement over a 5-day (week) period. QQQ is apt to continue rising as long as the EMAs remain in uptrending order, showing upward bullish trend strength. In March and May this year, price pulled back toward the 21 EMA and has bounced up off that area.
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 should remain intact, and price should continue to rise. We will keep an eye on QQQ’s movement over the course of the next few weeks.
It almost reached 369. For this week, we will consider and discuss a closer strike since it seems the QQQs have been making smaller moves. The target is $372.
Potential Profit Play for QQQ
The EMAs are in uptrending order, so the uptrend is apt to continue.
Let’s discuss a trade over a short period of time. The QQQs touched all-time high and then pulled back, so let’s discuss a trade that may last just a week or two. For this discussion, we won’t buy as much time.
If the QQQs moves above and stays above 369, you could consider an entry. If pulls back, wait, don’t enter until it moves back above 369.
To buy shares of QQQ today, if it moves above the 369 mark, would cost approximately $369 per share. If price rises to the target or $372, the profit would be $3 per share or 1.08%. Not overly impressive.
Option trading offers the potential of a lower initial investment and higher percentage gain. Let’s take a look.
If you bought 2 shares of QQQ at $369, you would invest a total of $738. If it increased in price to $372, you would earn a profit of $3 or $6 for the 2 shares or .08% – not terrific if it rises over a couple weeks.
If you bought one option contract covering 100 shares of QQQ with a Sept 1st expiration date (Sept wk1) (just 2+ weeks from now) for the 372 strike and premium would be approximately $2.79 today as I write, or $279 per contract. If price increased the expected $3 over the next 2 weeks, the premium would increase approximately $2 to $4.29. This is a gain of $2 or $200 for the contract or 72%. That is pretty good in a short period of time and shows the leverage of option trading.
For the same approximate investment, you could purchase 3 contracts. $279 x 3 equals $837 which would earn a profit of $600 versus the stock profit of $6 spending $100 more.
Options often offer a smaller overall investment, covering more shares of stock and potential for greater profits.
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 the 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”.
Yours For A Prosperous Future,
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.
Past trade update:
Two weeks ago, we looked at August 20th 370 strike for a premium of 3.06. On Thursday, premium went as high as 3.81. Since then, the QQQs have moved very little, and this trade has lost time value as it nears expiration. See the article here.
Last week, we studied the Aug 30th expiration 372 for a premium of 3.34. Because there was back and forth movement which ended down a little, premium is now 2.28. It still has about two weeks to recover and move up. This said, it is wise to have an acceptable loss in mind and close a trade if it reaches that amount. See the article here.