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Members Update - New Trade Setup on the QQQ


We're going to address a new trade setup on the QQQ. Our plan is to get long the QQQ in a combination of both the common & we may potentially add an options trade to that as well. We'll address that in the body of this post below. But first off we want to address the current market environment & distinguish what kind of trade setups are in vogue. The market changes. What was popular during one cycle will fade in another cycle.

Specifically we'll address the following 2 concepts:




Both can be parlayed in the same trading arena/cycle, but many times one style will yield more successful outcomes than the former. In other words,

not everything is going to be a buy-the-breakout-on-strong-volume-kinda-trade.

Momentum chasing is an art but it needs to be framed within the context of what kind of market environment stocks are in. The idea behind momentum chasing high probability setups is predicated around finding strong pattern cultivation on stocks printing higher-highs and higher-lows, and/or those that are basing into a tight consolidation range with the intent of catching a position that is about to shift trend sentiment and breakout to the upside out of that consolidation range or pivot high. This is classic price chasing.

But yet there are cycles when the near term & intermediate term trends go through bearish cycles while the market sorts itself out. During such periods there is massive opportunity in exploiting bearish extremes....where the fashionable trade is stalking those extreme oversold conditions where a stock has exhibited a consistent historical precedent of bouncing off those levels. Very simply, its buying low and selling higher. Just how we got into the AAPL March 100/110 call spread @ a cost basis of $5 when AAPL went through a heavy pullback. That position stands to make 100% ROI so long as AAPL simply stays above $110 by March. So incredible risk/reward setup. Yet we only got that favorable pricing because of the volatility drop during that time.

The point here is, that not everything will be a momentum breakout type setup. Many times the best rewards are buying deep pullbacks or capitulation extreme lows in the market. So we'll outline more about this next trade setup in a moment. Let's first address what AAPL & the QQQ are going through...and then we'll define the trade setup that we're currently stalking.

As of the close this Thursday, AAPL very strongly outperformed the broader market. Apple isn't anywhere close to leading the sell-off. In fact, Apple has been completely resistant to all selling pressure from the market these last 2 days especially. Other big names in tech are getting shot right in the face. Some are going down 3% and others are down 5% in just two days. The NASDAQ-100 has outright reversed the entire November rally in just two days. It's down 1.6% today after being down 1.21% yesterday. That's a 2.8% loss in two sessions which is a lot when you consider how big of a correction the NASDAQ-100 underwent and how much of the recovery it just lost. Meaning the percentages are significant relative to the current environment. What's more, the NASDAQ-100 is now deeply oversold and Apple is still sitting there at a 40-RSI barely even under its support at $110. What's more, while Apple was down yesterday, it completey outperformed the market sell-off and is outperforming today.

Just to give you some comparisons, Apple is down 1.72% this week. Facebook is down 3.71%, Google is down 3%, Microsoft is down 2.53%, Amazon is down 5.16%, Netflix is down 1.91% (but down huge the past two days as it started the week up strong), Tesla is down about 4%, Qualcomm is down 4.13% (5.83% today alone) and IBM is down 2.32%.

So consider that for a moment. Apple is doing much better than virtually all of the bigger names in technology (and popular ones). The NASDAQ-100 is down 3.3% and down significantly the past two days.

The point here is this. For whatever reason, Apple is resisting the sell-off. Normally, Apple lags. It almost never leads the market anymore. If the market is down 3%, Apple is typically down 5% or more. That's how it goes these days. It leads on the way up. While the SPY rebound like 5% off of its lows for example (same with the NASDAQ-100), Apple rebounded 8% off the lows. So that's where the typical outperformance is found -- on rallies.

What this tells me is that Apple is probably going down the bottoming path rather than a complete dismantling of this massive bottoming formation we've been undergoing for nearly a year now. Even today every little bounce in the market is accentuated in Apple and every new leg down is resisted. We're talking interday today. The NASDAQ-100 has been making new lows on the hour and sitting at an 18-RSI while Apple is trading above this morning's lows and making no new lows with the market. The NASDAQ-100 is all the way back to its early November lows while Apple is sill trading a good $5.00 above those lows.

First, let's take a look at Apple's hourly chart we've been outlining for the last 2 weeks on AAPL's inverted Head & Shoulder bottom. So far this formation is playing out to a T. You can see that the most ideal situation would be to have Apple bottoming at the $108.00 level. That would be the most ideal as it would confirm this textbook inverted head & shoulders bottom that looks to be cultivating. Take a look at the updated view comparing the pattern development today vs the priors - hourly time frame

As we can see so far right now, the right shoulder is getting close to that $108 level, which would be perfectly aligned with the left shoulders. There are two left shoulders and symmetry in this regard doesn't really matter. You can have three left shoulders and two right shoulders and it's all the same. In fact, the more shoulders, the more weight the pattern has. The most textbook head & shoulders bottom I've ever seen was one that Apple formed in late June 2011 and that one had three shoulders at varying levels on both the left and right side of the head and it looked perfect. Apple did bottom on that pattern, broke out and met it's upside target very early on in a much larger rally. This one does look pretty good at this point, but a bottom or an intra-week reversal at $108 would further reinforce the outlook on this pattern.

So even if Apple were to fall to $108 and bounce all the way back to $110 in the same day, it would be perfectly fine. In fact, the two left shoulders were both intra-hour reversals. The first shoulder reversed $0.50 while the other reversed $1.20. Now even if Apple doesn't get down to $108, it's still technically a right shoulder at this point. Just not a very well defined one. We would like to see Apple get down to $108.50 at a minimum, but don't think we'll get there. We'll explain why in a moment.

Now here's the bottom line. Apple has resisted this selling pressure from the market. It is outperforming right now. In fact, it is now almost outperforming by a measure of 2-1. Apple is down 0.95% to the NASDAQ-100's 1.8%. So it's close to 2-1. Most of the tech names I mentioned above are far underperforming Apple right now.

This suggests that Apple is gravitating to the upside. There's a force pulling it up. Secondly, Apple is near a 30-RSI now on the hourly. And I wouldn't underestimate that. When Apple want to move forward -- meaning when it's not falling off a cliff and underperforming -- a 30-RSI on the hourly can be a strong catalyst for a sharp rally. The same goes with a 70-RSI for a sharp sell-off. We've seen it happen were Apple has rebounded in a dead cat bounce of sorts, touched a 70-RSI for a brief moment and then collapsed. The point here is that the 30-RSI on the hourly could signify a sharp bottom for Apple. Take a look below:

To further support this idea of a 30-RSI marking a potential low (if Apple gets there at all) is the fact that the NASDAQ-100 has now been trading at deeply oversold levels for hours now. What's more, the NASDAQ-100 appears to be forming an inverted head & shoulders of its own. A very deep one. The last time we saw the NASDAQ-100 this oversold, it went on a massive multi-day rally with big percentage gains. If the NASDAQ-100 bottoms Friday and starts to reverse course and then we get a 2% up day say on Monday, well you can bet that kind of action will put a lot of upside pressure on Apple. I suspect we might see something like that very soon. If you look at the NASDAQ-100 over the past 7-months, you can see that we got down to a 20-RSI on the hourly on three prior occasions. In every prior recent occasion, this immediately lead to either a multi-week rally or at least a very very sharp multi-day bounce. Take a look at the image below which I had to post to imgur for now:

This chart basically tells us that the NASDAQ-100 is sitting pretty much at the edge of a very sharp rally. So much so that we may soon be taking a long position on the QQQ. We may even add a booster options trade with a small allocation of 1% to 2% portfolio weighting buying some near-term options. Right now we're considering the December 23 expiration on the 117 QQQ calls or the January 115 calls.

A Booster trade is an options trade where we allocate/risk a very small amount of the portfolio on a trade setup that has a high probability to get a double in short order, but in the opposite vein if we're wrong then we've only risked depreciation on a small tranche of the folio. If we were in a bear market, then a booster trade would never be considered. But we're still very much in a bull market. Nearly the entire market is a feather away from all time highs still. In this kind of market environment, you can bet that big bounces will occur when there is heavy pullback volatility.

The point here is this, the probability is just very high that we see a sharp rally soon. In fact, don't be surprised to see Apple and the markets reverse course this Friday before the close or sometime early next week. We'd forecast Monday as a greedy target. That's a very distinct possibility. You have to keep in mind that traders, institutions, hedge funds, technicians etc all see this 20-RSI reading on the index(es). Algo-bots, very much included, have scripted buy orders placed to buy when plumeting extreme lows get printed on a 20-RSI drop. Why? Because if you bought at a 20-RSI reading at any point in the bull market kickoff post financial-crisis, then you were more than made whole at some point, most of the time nearly the day of you were profitably green the next day. Like more often than not, a 20-RSI marked a complete reversal. But it's important to distinguish that not all 20-RSI drops were/are the absolute bottom, but historically it's been the place where the bottom wasn't far.

So we will most certainly be taking a long position on the QQQ via stock. That may be just the stock wholesale or we may additionally add the booster trade, where we observe the price action for a day or 2 max after our stock entry to decide if we'll go long on the options.

Again, the reason we're doing this is because we do think that the next few days are likely going to see a sharp rebound that should take the NASDAQ-100 up to at least $117 to a share. That should result in at least a 50% or so gain on these options. Remember, this is a high-risk, high-reward, high-probability set-up trade if we add the booster. The idea is to take 1% and invest it in a strategy that aims to produce 50-200% gains on each trade and to keep making consecutive good trades. We believe this set-up in the NASDAQ-100 is solid. Even if the QQQ falls a little further, it is so extremely oversold -- even reaching an intraday low of 18.54-RSI on the hourly -- that a sharp rebound is due and I think at a minimum we would be able to get out with no loss even if things don't go as planned. Meaning, even if the NASDAQ-100 falls further, we're likely going to see a rebound that will let us exit at even money. But we're more likely to see gains here.

It's important to distinguish, even if the NASDAQ-100 is on the way down and gearing up to go full crash mode, we will still see a sharp rebound given how oversold it is. We see it every time the NASDAQ-100 trades under a 20-RSI for an extended period of time. And the QQQ has been sub-20 all day long. At the close of the session today we did see RSI close into the green at 22-RSI on an hourly which could be a sign that the reversal is already beginning. We expect to see something like 15-30 consecutive hours of buying pressure. Maybe a bounce up to around $117.40 where we saw a sharp hourly bar down. Then at $117.40 the QQQ will either push for another leg lower or it will just simply make its way back to the highs. But he point is that we should expect to see a sharp rebound to test that $117.40 level sometime in the next few days essentially erasing today's losses. Now take a look at this chart below. Notice how the NASDAQ-100 is forming an inverted head & shoulders of sorts. The same sort of pattern we're seeing on Apple but to a much larger degree:

You can also see Apple's inverted Head & shoulders emerge here. Obviously I would have been happier if Apple came down to the $108 or at least $108.50 level first, but a touchdown of the low $109's does in fact form a shoulder. It's a $3.00 sell-off from the neck-line. So the shoulder is there:

Dec 1 - Inverted H&S Bottom

Now to sum up what we're considering on this next long entry, here's our expectation for the NASDAQ-100. Now as of present, we believe that we are very much still in a bull market. Until the primary term trend is dismantled, the benefit of the doubt continues to go to the buyers. Now that thesis could change. We are looking at an alignment of several indicators in gauging the quality of momentum & breadth thrust that's been coming into this market. When scanning this data for confluence we're looking specifically at macro data on both the monthly & quarterly time-frames. There are some concerns but those concerns keep getting negated because of the number 1 most important indicator of them all is leading the charge and that is PRICE ACTION. Until price-action fails & confirms some of the other indicators that suggest the larger narrative here is gearing for a breakdown, we will continue to give the benefit of the doubt to the buyers. On every one of these pullbacks that's occurred we're always hawkishly observant for context clues that this market is coming to a halt. What's important to distinguish is that being a bear has not paid well. That's just the brass truth. If you listened to Marc Faber and got scared out of your positions selling at the lows as CNBC fear-pumped the airwaves then were essentially assed out. The important thing to distinguish here is that it's paid well to be a buyer on all these pullbacks. Will the last forever, nothing ever does and so we are vigilantly scanning for an official sell signal. Until price action confers with other indicators that suggest the same, we will directionally acknowledge that trend.

So as of right now, we of course have to observe whether what we've been seeing the past two days is a huge head fake ahead of what will be a strong close to the year. That can happen. Today could be just a huge head-fake which leads to a very strong showing in December. That's one possibility. And even if the NASDAQ-100 doesn't take that path, I still think that we will see at least a sharp rebound up to $117.50 or thereabouts in the near-term (by next Tuesday). Here are the two different scenarios:

Scenario #1: The Super Bull

Scenario #2: The Dead Cat Bounce

Late 2015 thru all of 2016 → RSI-20 Touchdowns

Notice that even on the huge downtrend we saw in January 2016, when the QQQ gapped down in late December 2015, it hit a 20-RSI and rebounded $2.00 before continuing its downtrend. Notice that we saw a $2.00 rebound before that continued however. Then we saw a 20-RSI event in February 2016 which preceded a sharp rebound, retest of the lows and a gargantuan rally. We saw a 20-RSI even in late June 2016 which lead to a rally from $101 up to $114 in just a month's time. If that happened here, the options we're considering would appreciate around +1000% in the process. I mean the QQQ ran up like $10 in just a two weeks.


This above is the prior year. I think all of the moves here are self-explanatory.

2013 - 2014

Again, if you look at 2013-2014, I think you can draw your own conclusions. Just look very closely at the chart. What you can see here is there is a consistent trend with the NASDAQ-100 rallying at least $2.00 if not more like 3% after reaching a 20-RSI AT A BARE MINIMUM. Meaning, in a lot of these cases you're seeing extended multi-month rallies. In our case, our plan is to get long the & continue to hold the common stock in the BotTrigger folio if it looks like the NASDAQ-100 wants to push back to the highs. And if it does, then our outperformance this year will be pretty set. If this inverted head & shoulders is for real, we could easily see a 10% rally in the NASDAQ-100 which would result in significant outperformance.

So our plan is to possibly sell if it appears this is just going to be a dead cat bounce but hold if the QQQ looks like it wants to go back to the highs. If the NASDAQ-100 goes extremely overbought, we may sell options against our position. That's yet another tool that we may use at our disposal.

If we add the route of the options booster play, on the other hand, we would probably sell after the QQQ moves up 2-3%. We're going to be very trigger happy because we are threading a pretty thin needle here. That booster would expire in just 15-sessions. Our expectation is this is going to rebound in the next few days. So there's no reason to pay up in time value which will lessen our gains on the rebound.

So just to give you an idea about those QQQ options that we're considering; they are down $0.86 or 45.84% on the day. They have fallen from $1.87 the previous day to the close of Thursday to $0.86. Notice that if the NASDAQ-100 simply just reversed today's losses and were to trade back up near $117.50, those could conceivably rally back up to $1.80+ which would be closet to a 100% gain. Our plan is to seek an entry at the open tomorrow if we get any more downside action. Again this would be a small allocation. Putting up 1% every time the NASDAQ-100 reaches a 20-RSI will lead to net positive massive returns more often than not. There will be instances where it leads to a 500% gains in a very short period of time. Thus, so what if you lose 1% every like 10 attempts? That's the point of playing a booster. It's to consistently try to produce big returns on small amounts of money far far more often than not.

So our main goal here is to add the QQQ common stock first. Hopefully this Friday on a pullback or if even a clear cut reversal. IF and only if we get more downside this Friday or Monday, then we will initiate the options trade. If the reversal on the QQQ happens immediately this Friday morning then we will pass-go and drop the options booster all together. We only want to take the options trade if we see any more weakness then what we've already experienced. Even though options prices are already beaten pretty badly, we'd ideally want a deeper discount if we can get it. If not, then that's all she wrote and we'll stick to just adding the common.

Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”

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