Sunday, January 23, 2011

Ruffled Feathers and Buy Signals on the $QQQQ and $NDX


The MLK holiday shortened week sure was an exciting one. Volatility perked up like I anticipated and it seems like every bull has been converted to a bear after 3 down days on the Q's.  Some feathers have been ruffled and undergarments bunched because of a whopping 2+% weekly loss. Yes, the rally is taking some pressure and a correction may be imminent, but we may have temporarily over-reacted to the price action of the market.

Right now, the QQQQ is short-term oversold by most of my indicators. Below are some thoughts and studies about our tech indexes.

QQQQ Down 3 Straight Days

The Q's are still in an uptrend, as evidenced by a close above its 200 day MA. Looking at its RSI(2) reading of 6.50, it would be considered oversold [anything below 10 is OS]. And being down 3 straight days is not as bearish as you might think. So here goes:


When QQQQ drops 3 straight days and has RSI(2)<10, buy on close > 200 day MA; sell when RSI(2)>65. $10,000 per trade; 2000 to present.
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
     4,193.20
53
37
69.81
-13.20
0.79
      201.71
       (204.39)
2.28
0.99


So this event is not negative. One thing to note is that this study uses a dynamic exit [RSI(2)>65] vs static [exit 'n' days later]. Dynamic is always better than dynamic in my opinion. The average winners are about the same as the losers, but the 70% win rate makes this study bullish. Average hold is 5 days.

VXN Stretched and NDX Oversold

VXN, CBOE NASDAQ 100 Volatility Index, was up over 22% on the week. I noted what happens when the VIX rises 20% on the week, and the activity of the VXN mirrors the VIX under these circumstances.
I've also noted how stretched VXN is above its 5 day moving average: 5% above the 5 day MA for 3 straight days. This VXN condition plus an oversold RSI(2) level below 10 is usually a short-term buy signal for the NDX.


When VXN is 5% above 5 day MA for 3 straight days, buy NDX on close > 200 day MA and a RSI(2)<10;  Sell RSI(2)>65. $10,000 per trade; 2000 to present.
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
0.94
   6,412.45
68
51
75.00
-12.78
0.94
     198.45
     (218.15)
2.73
0.91


Similar to the other study, average win and losses are about the same, but the winning % indicates a bullish bias.

NASDAQ McClellan Oscillator at -50



The NASDAQ McClellan Oscillator is also at -50,  which is also short-term oversold and bullish. I noted it in a bullish study here, so it is another thing to keep on your radar for the week.

Conclusion

With all the sketchiness out there over the last week, there are studies in play that play that are actually bullish. Of course, we can go lower again Monday, but with every additional down day, the NASDAQ becomes more oversold and susceptible to a nice short-term bounce. Please note that these studies are most concerned with the activity over the next few days. There could be a pop Mon/Tues, then a another whoosh downward. I'm just trying to catch the pop. We may enter a correction that may last a few weeks/months, so be aware of your time frames.

Good trading out there.

1/24/11 Note: QQQQ and NDX closed today with a RSI(2) of 66. So the study is closed, 1.4% positive.

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