Stocks were in rally mode Wednesday. It’s something we said might be coming in our most recent Market View E-letter. We noted that “It sure looks like Wall Street intends on testing mid-June’s lows.” But added, “However, stocks could get some juice in the not-so-distant future. The NASDAQ’s Relative Strength Index (RSI) is only a few points from 30 and entering oversold territory.”
Overall, the market continues to have risk to the downside, in our opinion, and could get stuck on technical resistance with another move similar to Wednesday’s action. Selling into strength was the right tactic during the market’s fall into a bear market and could be the right strategy again.
Some investors want to do more than build their cash reserve during down times and would like to profit if stocks fall. There are a couple of ways to make money while stocks fall, provided you are on the right side.
You can short stocks but shorting requires margin and opens the door to major losses.
You can sell a futures contract, but they are leveraged through the roof and have massive volatility.
You can buy an inverse index exchange-traded fund (ETF). These go up when the market goes down and down when the market goes up.
We feel the third choice is the least dangerous of the three, in our view.
With that in mind, let’s look at ProShares Short QQQ (PSQ). The ETF’s objective is to return the opposite of the NASDAQ 100 on a daily basis. For example, if the NASDAQ 100 drops 1% in a day, PSQ should rise 1%. Of course, if the NASDAQ 100 goes up 1%, then PSQ would lose 1%.
As you can imagine, ProShares Short QQQ’s chart is the upside-down version of the NASDAQ. PSQ should catch support between its 50-day moving average of $13.90 and technical support at $13. As of Wednesday’s close, the ETF trades at $13.40.
Patient investors might wait to see if the mid-week rally has legs and consider PSQ in the $13ish support zone. If now or later, new short-term shareholders might consider cutting losses if PSQ closes below support at $12.75.
To the upside, if the bear resumes and PSQ closes above $13.75, the NASDAQ 100 would be on target to complete a possible upside-down triangle pattern and test June’s lows, putting PSQ in the neighborhood of $15.00.
Of course, swing/day trading is risky business and only appropriate for the most aggressive investors who can afford to lose large amounts of money in short timeframes.