Gee, Think.

I’m back with another chart of my favorite financial instrument, the NASDAQ 100 trust QQQQ, better known as the Qs!

First of all, I am astounded at the way that they rallied since July 21st. I mean, wow! I thought that the Qs were going to be headed down even further, but no! They really surprised me there! They fell roughly 16.6% from May 8th to July 21st, and subsequently rallied 25% from July 21st to November 24th 2006. That’s an amazing range in 6 months! I certainly didn’t see that kind of recovery coming. However I am relentless, and will try to make another prediction of where the Qs are headed over the next 20 trading days. See the chart below:

Here we can see that the Qs were in a undeniable 45 degree uptrend for a good 4 months.  Two months since November 24th, we are essentially flat.  This means that the trend has died. The angle of ascent has disappeared.  It now seems that the Qs are facing resistance from a  line that was first touched back on April 4th 2001 as the day’s low at approximately 33.83.  On that day it was support.  Since then this line has been resitance on January 20th 2004, December 3rd & 15th 2004, and broken briefly on January 11th & 12th 2006.  It was tested again November 22nd and 24th 2006.  More recently we hit the line again on January 12th and 16th.  Suffice it to say that this line has been significant in the geometry of the Qs over the past years.  It has never been soundly broken since becoming resistance.  I venture that the Qs will not break this trendline.  They have been pushed quite hard over the last 7 months, and I think they’re ready for a retracement to at least the 42.20 area over the next 20 trading days.  However, we can see that the relative strength of the Qs is still respectable at the 58% level.  I see a coming advance to test the long time resistance line hitting at least 45.30 before turning lower.

I won’t have the time to actually trade this, but I’m still considering what options plays would be best based on this opinion of the market.  Deciding which way the market is going is one thing, but choosing the right options strategy is another entirely.  Something that crossed my mind was selling one-point options spreads.  Selling n out of the money a put spread as the Qs turn up from support, and then selling an out of the money call spread as the Qs turn down from resistance.  based on this analysis, I would choose something like the 43/44 put spread and the 45/46 call spread.

Remember, this is not an endorsement, just my own humble amatuer opinion.

This entry was posted on Sunday, February 4th, 2007 at 7:28 pm and is filed under analysis, market, option, stock. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.