Friday, March 09, 2007

Is The Market Ready To Go Down?




Today I shorted all 3 indices near the open. If you've been reading my blog for the past 2 weeks, you should know the reasons why I chose to scale into my short position today.

The past few days I've been posting charts of the DIA, SPY and QQQQ with the fibonacci retracement levels overlayed on the chart. I said I'm waiting for the market to enter the fib zone and then I'll look for reasons to get short. Today all 3 indices made a one third or slightly more retracement at the open. Now all I needed was a pattern to enter the trade. Any idea what that was? I posted about this pattern last week. It's called fading the gap. You can read last week's post here.

Today the QQQQ, SPY and DIA all gapped above the previous day's high. I shorted all 3 a few minutes after the open and exited half the trade when the market went negative. This is a day trading strategy and usually I will exit the entire trade at the unchanged level, but I chose not to do that today because I'm thinking of the big picture. I'm using this day trading technique (gap fade) as a low risk way to enter into a longer term swing trade. Like I said before all 3 markets entered into the fib retracement zone at the open, so I'm going to hold this trade. The Yen also retraced into it's fib zone today.

Another thing I noticed about the QQQQ which I consider bearish is that during this 4 day rally, 3 of those days contained closes below the open. As the market was moving higher, there were sellers dominating the day's price action. I take that as a bearish sign.

If the market rallies next week, I will short more as the market approaches the 50% level. My maximum stop will be a move above the upper retracement level. I marked it off in red in the above chart. Anyway, that's my game plan. Let's see what happens next week.

9 comments:

Raj said...

Kevin,

Great work here. Thanks

Raj

Eric said...

hope your right Kev, your not the only one holding some shorts in the Q's. Good work

Peter said...

Kevin,
This is my first post here and I'm learning a lot from you. Thanks for sharing your passion. Question about shorting stocks: now that inverse etfs are available, like QID, SDS, DXD, why would someone want to short a stock, when you can go "long" with an inverse? Additionally, some of these inverse etfs are leveraged 2 times, like QID and DXD, and that might be an additional benefit depending on your outlook.

Randal said...

Kevin,

What does this chart tell you ?
FNM

I think its headed much lower along with other mortgage and credit related stocks.

thoughts ?

Kevin said...

Hi Peter,

I'm actually long QID. I don't want to confuse people so I keep it simple and just say I have QQQQ short.

tommy t said...

K..good stuff, and I like reading your stuff..you seem like one of the few who is good at this stuff..question, for day trading purposes where would be a good place to put a stop on these gap trades?

Thanks

Tom

Kevin said...

Placing stops depends on the current volatility.. What I do is look at the previous gap trades and determine how much movement takes place around the open. Sometimes you need to risk .30 for the qqqqq and at other times it might be .60... It depends..

I also use a time stop. If the trade isn't working by 10:00 to 10:30, I'll take the trade off even though my stop wasn't hit.

Kevin said...

Hi Randal

I agree with you. FNM looks like it's headed lower.

tommy t said...

Kevin..thanks! the time stop of 10-10:30, what time zone r u in?

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