QQQ Short Trade Set Up - Price Logic and Bearish Divergence

Click on Chart to Enlarge

The chart shown here is an hourly of QQQ which is the Nasdaq 100 ETF.  For those who have followed this blog for a while and understand some concepts related to price logic and divergences, this should be an interesting pattern to watch unfold.  There is an obvious bearish set up here to short or inverse the Nasdaq if an appropriate signal occurs beneath point 0.

So notice the the move from -1 to 0 was retraced in less time than it took to form.  That indicates a probable short term (at least) pattern completion and the beginning of a new downward pattern in the market of some degree.  Now it is clear that the price action upwards from point X has occurred more slowly and with clear corrective/overlapping swings, suggesting that the move up from point X is probably a correction against a still developing larger downward price trend.

Since the smallest "pattern" that can develop is a 3 wave move, and point X has not been breached, it would seem likely that the next move down is likely to move below point X.  The other possibility from a pattern perspective is that a sideways/triangular pattern is forming within the bounds of points 0 and X.  In that case price would not be expected to break point X.

Now the study below the chart is a money flow index which is basically an RSI of both price and volume combined.  So it tends to be a leading indicator more so that price only based studies like MACD or RSI, etc.  Currently the MFI is displaying a bearish divergence at today's new high for the recent rally from point X.  Now the MFI is not at an extreme level, so it is arguably to significant.  But the other reasonable interpretation is that the current up move is very weak and this is an imminent sign of topping and another directional downward thrust in price.

Analysis is easy.

Consistently making objective buys, stop adjustments, and sells is much more challenging.

So for the trader here this pattern creates a nice set up to short the market or make a stop adjustment on an open short position to above point C if a sell signal is generated below point 0.  Another speculative play here would be to buy put options on the indexes here.  An ATM put option with April 24 expiration would have a very reasonable 100%+ profit potential if prices decline to point X before expiration.

If you have questions or ideas on managing open trades here or entering new positions, comment and we can proceed with further analysis and planning.

Pete