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Monday, May 14, 2007

Why I think the NASDAQ is in trouble

I wanted to write a small post to describe what steps I took that led me to believe it was time to bail out of QLD, the ProShares Ultra QQQ ETF, and jump into QID, the ProShares UltraShort QQQ ETF.

First, general intuition came into play. I was not alone in feeling that the markets were over-bought. There was plenty of discussion on this topic in the financial press and on financial web sites and blogs. The economic news continues to be somewhat downbeat so the current healthy earnings season and rising stock prices came as somewhat of a surprise. This lack of correlation between the economy and stock prices sounded a cautionary note.

Checking the site, which is one of the tools provided on the TradeRadar blog, my overbought assumption seemed to be reinforced. The site showed QQQQ, for example, to be at the top of their proprietary RallyBand and the reversion to the filtered trend or down to the bottom of the RallyBand seemed to be the most likely next move. Indeed, the site indicated that the short trade had the most potential for success. The chart is below:

I also checked the site. Their candlestick analysis rated the QQQQ a Hold. Interestingly, they noted that they had put out a Buy signal 38 days ago. Since then, QQQQ had gained well over 5%. Based on that alone, I thought it was about time for a short-term pullback.

I also checked the TradeRadar BUY/SELL signal. I set the starting point at March 2, the bottom of the recent pulback that began in late February. I set the filtering to 2 days and looked for a SELL signal. Sure enough, the peak was there. The trailing edge did not quite dip down into the SELL zone but the strength of the signal, combined with the factors mentioned above, were enough to move me to be bearish on QQQQ. Here is how the signal looked:

I don't presume to know whether this will be a short-term pullback or a longer term slide; nevertheless, I felt it was necessary to get out of QLD. These ProShares Ultra funds are great when the market is going in the desired direction but when it turns against you, it is difficult to watch these funds dive twice as fast as the associated index. I have decided that if I am going to hold these funds, I will take a short-term approach.

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