Sell rules aren't just a way to protect yourself from a losing trade. It's important to also have sell rules that protect your profits when you have a good trade. With the Nasdaq composite leading the market indexes, we took advantage by using the leveraged version of the Nasdaq 100, QLD, as a way to participate in market strength.
Market Turns Are Times To Get Aggressive
The market pullback that started in March led to an 8% correction for the Nasdaq composite. But what can really hurt a portfolio is that leading stocks will often come off 1.5 to 2.5 times the market.
Eventually, the Invesco QQQ Trust got back above its 50-day moving average line (1) and we added it to SwingTrader that day. We really wanted the leveraged version of the Nasdaq 100, the ProShares Ultra QQQ ETF because it offers 2x leverage. But we needed to earn the right to get more aggressive.
After taking profits into strength on QQQ, we started looking for an opportunity to pick up QLD. We initially started a position on May 23 but quickly backed away when it reversed (2).
Usually you expect further weakness after a downside reversal. If that doesn't materialize, the positive expectation breaker is reason to get more aggressive. That's why we bought our QLD position right back the next day (3). We started with a half position and moved it to a full position as it held and built on its gains.
Shakeouts Happen, Even In Strong Markets
As strong as the Nasdaq 100 came roaring back, it wasn't without its trials. May 31 saw a dramatic shakeout in both the Nasdaq 100 and S&P 500, which dropped below their 21-day lines (4). Leverage is even tougher; at the lows our QLD position got hit twice as hard.
We scaled back our position to a half position but we really wanted to wait until the end of the day before we took action on the remainder. By the close, the indexes were back above their 21-day lines and we still had a position to work with. That made it easier to go right back to a full position a few days later as the Nasdaq 100 pushed to new high ground (5).
After consolidating a few days, the leveraged QQQ position continued to push forward (6) followed by a gap up and then an uncomfortable level of extension.
What To Do In An Extended Market
On June 17, the Nasdaq 100 was roughly 9% above its 50-day line (7). For QLD that translated into nearly double at over 17%. Recognizing that a pullback to the 50-day is normal, you need to start asking yourself how much of your gains are you willing to give up? Looking historically at QQQ, a 7% to 8% extension is usually when it takes a break. We'll sometimes wait until we see a reversal because you'll often see an 8% extension turn to 11% or more very quickly before it reverts to its mean. But the bottom line is, you need to have a plan.
Joe Fahmy explains why sell rules matter in this week's podcast
Even though the Nasdaq 100 action looked constructive the next day, we took the opportunity to bring our full position to just a quarter position (8). We left a little just in case it continued higher but we were comfortable booking the strong gain while we had it. With the leveraged QLD, we especially didn't want to see our profit evaporate quickly. Even a pullback to the 21-day line could be more pain than we'd be willing to withstand.
The downside reversal came the next day and we removed the remaining quarter position (9). Like the downside reversal from May 23 (2), we may come sprinting right back. In which case, we can buy our position back too. But if the weakness gets worse, we've locked in a solid gain selling into strength.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
