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Newsletter
May 21, 2003
Volume VI, Issue 49
Email : [email protected]
URL : http://www.otcjournal.com

To OTC Journal Members:
 

Bull Or Bear? If You're A Bull- Buy the QQQs Now

My inbox is filled with dire predictions of a head fake in the markets. Most of the technicians I follow are markedly bearish right now. They argue the recent rally is simply another relief rally in the ongoing bear market. But is it?

Despite the pullback this week, all four major indexes are still camped firmly above their 200 day moving averages (Dow, S&P 500, Comp, Russel 2000). The 200 day moving average is considered by many to be the benchmark for determining the long term trend.

One week ago the NASDAQ traded to a new high since making the October low, completing the pattern of making higher lows and higher highs. 

S&P 500 company quarterly earnings are in for the March quarter. The last stats I read had earnings up about 25% on revenue increases in the 8% range. Detractors explain away the earnings as being due to cost cutting, which has fully run its course. They attribute revenue increases to the falling dollar, which means overseas buyers have to pay more dollars for the same products.

True, growth remains tepid at best. The consumer, cashed up from refi's on the home front, is supporting the economy. 

However, Wall Street is looking six months down the road, and seems to be buying into the notion that economic stimulus will work if given the chance, which should translate into real top line growth and increased industrial production.

As Alan Greenspan pointed out in his testimony on Capitol Hill today, the economic has withstood several severe blows over the past three years- the bursting of the tech bubble, 911, Enronitis, and the Iraq War. Despite these seemingly deadly body blows, we are still on our feet, remarkably resilient, and the strongest economy in the world. So why shouldn't we be optimistic? 
 

The Simple Trend Line

On could argue the recent run up in the NASDAQ began in Mid March during earnings pre warning season, and continued to it's peak last Friday. Monday brought a fairly vicious sell off, sparked by Snow's comments on the dollar over this past weekend. It was is if the market was looking for an opportunity to test its mettle.

If you believe the recent earnings related uptrend remains intact, now is the time to roll the dice on the QQQ's, which is a basket of stocks which reflects the NASDAQ 100. As you can see from the chart, the QQQ tried to break its trend line today, and held. Since Monday's sell off, the market has tried to work lower each day, and failed. Therefore, we will probably see a rebound, opening the door to a high probablility trade.

There are several ways to trade the QQQ's. You can simply buy the stock, which trades on the AMEX. Or you can buy call options, which is my choice on a trade of this nature. I look at this as a gamble. When I gamble, I want the most bang for my buck.

Unless the market is down big at the open tomorrow, I will probably buy the July 27 calls, symbol: QAVGAA for my own account. They were offered at $1.75 at today's close. 10 calls would run you $1750 plus commission 

Alternatively, you could buy the options with lower strike prices for more money, or options with higher strike prices for less money. The higher the strike price, the riskier the options. 

I believe the NASDAQ could be ready to test the 1600 level in the next leg up. If so, the QQQ would probably trade to around $30, or just shy of there. In the options, this could translate to a sell at about $3.50, depending on how quickly it happens.

Here's your basics for today's idea:

  • Buy the QQQ's at the open tomorrow if they are above $27.25 (below this level would signal a trend reversal). The options are preferable for those who wish to gamble with greater leverage. The July 27 calls are my favorite at $1.75.
  • Price target- we'll reevaluate the picture if and when the NASDAQ challenges 1600, where we will probably take our profits.
  • Stop Loss (the most important part)- $27.25- if the QQQ's trade to $27.25 this will signal the trend has been broken to the downside. It will then be time to take your loss and move on.

Lots of comments on this past weekend's article on illegal naked short selling. We will publish some in the weekend edition.
 


Charts Provided Courtesy Of TradePortal.com
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