Mean-Reversion Counter-Trend Setup for QQQ
Updated
A relatively simple mean-reversion setup developed on QQQ today. We had a gap-and-go break last week's high on decreasing volume, creating bearish divergence on the cumulative volume percentage indicator. Maxx Momentum failing the 6 ema test on a parabolic-up (unsustainable move) triggers the entry. There may still be a day or two worth of shorts to squeeze out before this reverts to the mean, but there's a good chance we see a significant pullback before ATH's are breached. With Volatility getting crushed by mid-day today, puts a few weeks out were had for cheap at HOD. returning to the 15 period mean price on the 78 min chart within the week is most likely outcome, paying approximately 50% of the premium price. Would sell a close above ATH for about a 50% loss if it occurs before 2/8. The way I see it, this trade will pan out quickly either way, making long-puts the ideal way to play it. If we get a significant gap-down, I'd target fib retracements from last Friday's low with a stop at the exp b/e price around 321.
Trade closed: stop reached
This trade stopped out on 2/5. Upon review, the trade idea was flawed, as it assumed QQQ would exhibit mean reversion behavior despite the high degree of bullish momentum on multiple timeframes. While the ETF was Mean-reverting in January and most of the top holdings were in a consolidation pattern, the timing for this trade was poor due to holding over many of the top tech funds' quarterly ER's. We should NOT be expecting QQQ (or even SPY) to mean-revert when it is in a state of extreme momentum. They will keep going up, resting, and going higher until they stop going up all together. By then, the current mean will likely be more than 1SD lower. This is essentially why "timing tops" does not work as a trade plan. Momentum and mean reversion are mutually exclusive.
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