Reader Q & A

A frequent poster on my site is BlueCollarTrader. He raised an question that I thought warranted a longer response than usual.

Scott,
I've been meaning to ask this for some time... What is it that draws you to the QQQQ as an indicator for stocks and ETF's that track/trade primarily on the big board? I know it works for you and I see the correlation at EOD but I was just wondering what drew you to it initially. I also have seen that you like it as the means to track index volume as an indicator... as opposed to the SPY, for example, which also has volume indicators you could use. In a nutshell, I'm wondering what it is about the QQQQ's that you find unique/helpful, how it came to you that it has value, and why use the QQQQ and not the SPY that you prefer to track market volume?
Clearly it works for you! Would you share some insight as to why...?

BCT- Well as you know when I started I was fortunate to read 1 book about trading, it was- Robert Deels "The Strategic Electronic Day Trader" and in it he said to use the S&P 500 and QQQQ, so I did. No other mystery to it. I didn't know any better and fortunately his advice was bang on. I still use both side by side and over the years I've noticed the QQQQ reacts faster to the market changes. Most of the time both indexes move in lock step or very close to it but the Q's always seems to be a bit ahead. So I tend to focus on them more. Thats it. I’ve never used the SPY although I see it’s probably the most widely used indicator. Maybe that’s the “problem” with it if there is one. Following the herd.

Bear in mind that I am a momentum trader. All my decisions are derived from momentum. I want to be shown in the quickest way possible which way the wind is blowing or setting up to blow so to speak. The QQQQ gives me this.

Probably one of the most important "secrets" in trading is to not just focus on what an individual stock is doing but rather take in what the overall markets are doing at the same time be it the QQQQQ , SPY or whatever. Consider the term "Stock Markets". The markets are made up of numerous stocks. The "value" of these are what determines the value of the markets. Money flowing in or out of the stocks and markets move the markets. But and this is a big but, when the markets break certain established support or resistance levels, these events in themselves really move stocks. I’m sure that is obvious. Most traders or websites or blogs it seems, track with zombie like dedication, these levels. Every day you can read about certain levels on 100 different sites and predictions of what will happen. To me this is old news and I pay zero attention to it as you could probably make levels at every point on the DOW that sometime in the past there was an important event. As I have mentioned before, I focus on the near time price levels as they are more relevant to what is happening now due to current events.

So what I do is this-since I start my day an hour after the open, a pattern of the days trading has already shown itself. I draw a line at the high and low and other support and resistance levels in between on the QQQQ.

For example today (12/4/09), 1 hour after the open I drew lines on the QQQQ at 44.70, 44.57, 44.38 which were basically the important levels up to that point. I shorted AAPL at 10:30 and then it broke that 44.57 level. Even though the QQQQ jinked around a bit, AAPL was moving down fast. I covered at the 11:00 candle as it was quite huge and I had almost a $2 gain and the QQQQ was getting near that 44.38 level. AAPL jinked around a bit more and probability said that it will bounce and then drop down based on how I saw the market and stock action earlier in the day. I waited for an opportune time just as the 5 minute candles are changing and shorted it again at 11:10. Notice the QQQQ put a doji in at that time. AAPL had a relatively nice green candle but on declining volume compared to the previous candle. The QQQQ doji told me of the greater probability of the overall markets dropping again. That little AAPL pop up was just a gift to short it at a higher price. Thank you market makers. 15 minutes later the bulls are crying in pain as the markets pile drive them to surrender, not coincidently at the 44.38 level on the QQQQ by the way. I cover with over a $6.50 gain when it ran out of steam.

So during all of this I put as much or more value on what the markets were doing and how they were acting than I did AAPL itself. The markets were clearly weak and they wanted to go down hard based on whatever information the markets were digesting at the time. I just played those probabilities and traded my plan. No emotion, no reaction, my system told me what to do. I did what I was told.

I guarantee you if you mark and watch the levels on the QQQQ early in the day, you will see the momentum acceleration points clearly when the markets are in motion.

This is looking at the big picture to see the smallest of clues of momentum and it works great.