Why is the Nasdaq Such an Easy Short Here?

When I go through my charts every day, there are a lot of things that I look for. Price is the most important of course, but momentum, moving averages, relative strength and price patterns are just a few of the other details that I try to focus on. The goal with all of this is to find risk/reward opportunities where the reward potential is exponentially greater than the risk involved.

This is why the Nasdaq Composite is such an easy short. Not because trading is easy, but because the risk here is so well-defined, and the reward possibilities are substantially greater. This is all that really matters. Look at the new highs in February and into early March. Momentum was nowhere near confirming them and now momentum is making lower lows.

3-24-2014 COMPQ daily

In my opinion, the big level here is 4250. This represents the highs from January 22 that turned into support throughout the month of March. As long as prices are below that, the Nasdaq Composite is a short all day long. Above that and things get messy skewing the risk/reward ratio away from being in favor of the bears.

You can see the exact same scenario in the Nasdaq100 $QQQ – the equivalent level here would be $89. Same bearish divergence, same rollover after failing at new highs:

3-24-2014 QQQ

This is nothing complicated. It doesn’t have to be. I’m a keep it simple kind of technician and this one is right up my alley. If we’re wrong, no big deal. If we’re right – home run. I love that. Remember we only want to be short below 4250 and 89 in the Nasdaq Composite and Nasdaq100 respectively.

Downside target? It’s tougher to say. A 5% move takes us down to the February lows, 7% takes us to the 200 day moving average and November lows. So these are two areas where it would be smart to take tactical shorts off. But if things get going we could see a lot more downside than that. We are seeing similar bearish divergences develop for the first time in the weekly charts. So from a structural perspective, things could be deteriorating. But we’ll worry about that down the road. Today it’s about the initial entry. And I like it short right here if we’re below these levels.