The last three weeks, SwingTrader hasn't seen a lot of activity. That's typical during a stock market correction. With a more volatile market and few stocks setting up, it's safer to view from the sidelines. But we do still venture in for some quick trades here and there. Here's why we entered the trade in QQQ stock, and why it didn't last long.
It Can Always Get Worse
Just to put the recent action in context, it's been a tough market. The Nasdaq composite hasn't been the same since the Nov. 22 top (1). One could argue the stock market correction started even earlier, it was just camouflaged by the higher weightings of a few stocks masking the weakness of the majority. That's been even more apparent in the narrower Nasdaq 100 represented by the Invesco QQQ ETF.
The year started on an up note (2), but there hasn't been much to cheer about since. When QQQ stock undercut the recent lows at 380, investors ingrained with a "buy-on-the-dip" mentality saw a new opportunity (3). And indeed a short rally followed. But resistance at the 21-day line (4) unleashed a 14% slide.
It's important to consider more than the bull-case scenario for trades. Risk management is critical, and you should always think of how to protect yourself if things get worse.
Strong Reversal Doesn't Guarantee Success
At its worst so far, QQQ stock was more than 18% off its highs. But its recent low on Jan. 24 also saw a dramatic reversal with more than a 5% swing from the low to high (5). The fear of missing out on a big rally might prompt aggressive action. But stock market corrections often show some of the strongest gains surrounded by even worse losses.
Still, our exposure was so low we did take a position in the ProShares Ultra S&P 500 ETF, a leveraged ETF, and closed it a couple days later with a quick profit.
Meanwhile, QQQ stock mostly stayed within the wide trading range of Jan. 24. But on Jan. 28, the QQQs undercut the lows of the prior day and started to rally strongly. This time instead of the S&P 500 exposure with SSO stock, we started a position with Nasdaq exposure and QQQ stock (6).
Managing Expectations For QQQ Stock
We dialed back our expectations for QQQ stock. A rally up to the 21-day moving average line provided more than a 5% profit potential and if that's all we got, that would be fine.
The next session saw a follow-through day in the market (7). While that is a positive signal for the potential end of a stock market correction, we took the opportunity to lock in our first third of profit. We locked in the second third when QQQ stock moved back above both its 21- and 200-day moving averages (8).
When QQQ stock gapped down the next day, we already had the bulk of our profit safely booked and we exited the rest (9). It played out according to expectations. But we retained the flexibility of reacting if our expectations weren't met or if they were exceeded. It's important to have an expectation or goal in mind. But always be prepared to change as new data points come to light.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
