Okay, now don't start sending hate mail my way just because I think it might be time for a break in the run-up for technology markets.
I am a long-term bull, but there are times when I believe taking profits off the table can create short-term opportunities for those who know where to look.
And that's exactly what I intend to do today.
Indeed, the trade I'm about to propose is going to provide a potential 200% return at an investment price that's downright cheap...
Technical Indicators Say Techs Are Cheap
A lot of the pundits say that tech stocks are overdone, like an overcooked steak left on the barbeque grill...
But why listen to the TV pundits? They are wrong time and again but take on credence merely through repetition.
So again I ask why listen to them? Instead, let's look at the real story.
I do believe tech stocks are oversold, and the accompanying chart shows you why.
A quick look at the PowerShares QQQ Trust (Nasdaq: QQQ) tells us that since the highs of March, the Nasdaq has descended in a lower-high and lower-low fashion.
In other words, as the highs are getting lower, so too is the volume leading up to those highs, indicating for the short-term that the Nasdaq is out of gas. If we did break down below the red support line, then I expect that range to become a target right around the lows of the year at $99 per share.
That would represent an 8% move lower from the current price of $107.50, while still maintaining a long-term bull market.
Now let me repeat that I am not looking for an all-out drop to the downside, just a modest move of around 8%.
Elections campaigns are starting to heat up, and this is the season where less news comes out of Washington. The less Washington changes, the better for stocks.
But I do believe that we need to do some profit taking.
So how do we make money when we expect a move to the downside? Let's talk about our profit moves right now.
Our Money-Making Opportunity Is Here
Shorting is a process where the trader will borrow shares from a firm and sell them to open a bearish position on the open market. A short-seller attempts to make money buying back the shares at a lower price, thereby realizing a profit.
A first action to take reflecting this would be for the QQQ to fall. But in this situation, we can merely sell short the QQQ at the current price of $107.50 per share.
If the stock falls to $99 per share, the trader may use this as a target and purchase the shares back at that price.
If that happened, we would see an immediate profit of $8.50 or $850 on 100 shares.
This comes with risk though, as short selling has unlimited risk if the price of QQQ actually moved up instead of our expected fall.
What else could we do to take advantage of a potential downside move in the Nasdaq?
How about buying an asset that goes up when the QQQ goes down, in this case, the ProShares Ultrashort QQQ (ETF) (NYSE Arca: QID). This is an ETF whose
investment mandate is to correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ 100.
The correlation is not perfect for the long term, but for short-term trades, it works beautifully.
Here's the most recent chart for the QID that will help us work through our next trade idea:
Remember in our first case we simply bought 100 shares of QID, and at the current price of $36 per share that would equal $3,600 for 100 shares.
An 8% move higher (remember we are looking for an 8% drop in QQQ) would give us a target near the green resistance line of $38 per share. That would equal roughly a $2 move in the stock, or $200 on our $3600 investment.
But there is a more profitable way to play our hunch on QQQ...
Buying Calls on QID
Here's where it gets interesting: if we buy a call (a bet on a stock falling) such as the one highlighted below, it should double in value, from $3 per option to $6 per option, if we get that 8% move in the QQQ (or QID respectively) as expected...
And the most you risk to us on this trade is the amount paid, which as of this writing is $300 per contract, or less than 10% of the cost of the stock or ETF trades!
If you are just a buy-and-hold type of trader, opportunity is nowhere to be found in a falling market.
However, for those stepping out of the box and looking at buying ETFs or calls on ETFs that rise when markets fall, opportunity is now here!
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.