Thursday, March 09, 2006

QQQQ Taking Aim at 40

Here is a trade that's in the cards: QQQQ should break through 40 wthin the next few days with a very high certainty. Are we betting this way? Most certainly - a good portion of our fund's money is parked in long April 41 puts. If we get another rally, we'll park more.

Why are we so certain?

Two reasons really:
  1. Technically, the market is developing a severe downtrend which is currently in the midst of making. It is being confirmed by many sectors and many other markets.
  2. More importantly, breaking below 40 will complete a much-awaited head-and-shoulders pattern. Just so you know I personally don't believe in this pattern (or most others for that matter). That's why I think the pattern will in fact occur - I've witnessed this sort of self-fulfilling prophecy ( this sounded far too much like a cliche but I had no better way of saying it) far too many times. That's also why I think that covering our short positions right below 40 will be the perfect trade.
In sum, I think NDX-100 is heading lower, but will it reach a new decision point above 1600 level. As far as I am concerned, QQQQ @ 39.75 or so constitutes a point of a random outcome. To make this perfectly clear, right now the action is non-random and should be traded with proper odds built into your risk management. Below 40, all aforementioned probabilities get thrown out of the window and a new game begins.

Before my readers point out that I am contradicting myself (I did say a "severe downtrend" above) which can't possibly imply a mere 1 point of decline in the Q's, understand that I am only talking about the probability of an impending break below 40. Given the context, my read is that this probability is in high 80's. However, after it plays out, future moves will have a different probability profile. - dictated by the function factoring the magnitude of the decline and elapsed time.

Today, I don't care about the future that far out. But in a few days I will.

Cheers,
/Dmitry

2 Comments:

At 7:01 AM, Blogger DAVID said...

No problem at all listing your blog- I found it thru Adam Warners blog and I liked it- Hope u enjoyed browsing mine- hope all is swell

david

 
At 3:51 PM, Blogger Dmitry said...

Thanks David. I really liked your blog as well - refreshing to see the insight and the research that you post as opposed to "just do this" that's so common these days.

Things are swell - looking forward to expiration :)

Good trading,
/Dmitry

 

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