It’s amazing how quickly the market can move. To think that the QQQQ tracking the Nasdaq exchange dropped over 50% from its highs only to recover 60% in just the last 5-months. This whipsaw type action can make your head spin. The last move off the bottom was nice, but don’t make the mistake of thinking it will go on forever. Using the chart above, some serious signs of a market reversal become apparent. When the chart speaks you should listen!
First off, take a look at the volume trend since late 2008. Notice how volume has been leveling off as the recent 60% upside move has taken place. While the Nasdaq and other major exchanges move higher, the enthusiasm behind that move seems to be wearing out.
Secondly, the QQQQ is running right into resistance at $41.25, with major resistance at $42.50. What makes this number a major resistance level you might be wondering? That level served as a major support level at one point last year. Many investors bought the QQQQ several times near $42.50 (or higher). When things broke down they were left underwater with shares worth much less than they paid for them. Using basic human psychology we can assume these investors would love to “sell out break even” and get their money back – creating a natural area of selling pressure or resistance.
Lastly, a sixty percent run off the bottom in just a 5-month time period is a little frothy to say the least. Using the fear and greed metric we can safely assume the pendulum has swung from investors being afraid of market conditions to investors loving market conditions. When too many people get on one side of a trade the market tends to make a correction.
Basic resistance trendlines indicate $41.25 and $42.50 on the QQQQ being major roadblocks. Volume seems to confirm what the trendlines are showing. Getting short the market at this point seems risky, but would also have huge rewards if the chart indications hold true.
So how do you set yourself up for a correction? First off, lighten up on your positions and take some profits. If you wish to take on increased risk consider buying short fund ETF’s or put options. Getting short through reverse index funds like TZA are great ways to play a market correction. The alternative would be buying put options on the QQQQ. Lastly, you could diversify into hard assets like gold and silver.
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