What analysis did you perform to conclude the QQQ's target at 34? (February 21, 2002)
That was our form of good old technical analysis. What we look at and what we teach in the online seminars is how to look at the elements that make up support and resistance and build a picture on you chart that puts all of those elements together so you can see the sequence of levels that will act as support and resistance and how strong those levels might be. When playing puts, we tend to play each leg down and not ride a leg back up to resistance simply because downside action tends to be steeper, but as we saw Wednesday, when it ends the rallies can be vicious as well.
With that in mind, when we picked out the entry point on the put play we simultaneously picked out our target. Two reasons for that. First, we always want to know what we are shooting for in the trade; we want to know our goal. That keeps us focused and helps us make the right decisions when we are in the play. Second, we want to know if the trade is going to give us enough of a move to make it easy to enter and exit without having to be a sharpshooter to do it. By using specific entry and exit points we focus on the trade and we stick to the plan; that gives us a much better 'win' percentage.
As for the specifics as to 34, we had drawn both the upper channel on the January downtrend and the lower channel that connected the January and early February lows. That set the lower range or the bounce point where the index would sell down to and then tend to bounce back up toward the upper channel. It is the exact opposite of stocks or indexes in an uptrend. Looking at that lower channel line and projecting it forward over a 3 to 4 day period, we saw it down at the 34 level.
In addition to that, we looked backwards in the chart looking for points of support. Back in early September the index bounced after crossing below 34 and found resistance there. On the way back up, it gapped up toward that level and then in late October held on the close just below 34 right before the Nasdaq started a big move up in November. Those past price points combined with the lower channel of the downtrend made what we call thicker ice. On top of that, the 50% Nasdaq retracement was right at that level, and if nothing else we felt the Nasdaq would bounce a bit there.
With that in mind we selected a target just inside of that support, and that was 34. As it turned out, that was dead on as the QQQ taped 33.93 intraday Wednesday and then ran up to close at 35.15. Thursday was another day, and it fell back below 34 on the close. Still, with puts we want to take the obvious move and not get too extended as the market can reverse near these support levels. We now wait for the next play to set up and then enter again when the percentages of an easy score are high. That is the key we teach in the seminars: look for those higher percentage plays, the plays you can hit again and again. Then when the market is better we can go for some longer balls on the upside.
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