Small Cap Slingshot

Not much to say. The PowerShares QQQ Trust (NASDAQ: QQQQ) fell 2.21% today on the highest volume in two months and did some major technical damage. Today's action along with my technical indicators confirm that a top has been put in. I will use any upward moves to increase my short position in the QQQQ with $48.85 as my stop (in case the bulls can pull a rabbit out of their hat).

So today seemed like any other day over the past month. The PowerShares QQQ Trust (NASDAQ: QQQQ) were up more than 1% with decent volume and new highs were being made again. In fact, at the day's high the QQQQ was only 3% down from where 2008 opened. It was like January and February never happened.

Then, smack! The bears jumped out from their hiding places with their baseball bats and started swinging. After the assault was completed, the day's gains were destroyed and lots of momentum stocks were injured. For example, take a look at Solarfun Power Holdings Co. Ltd (NASDAQ: SOLF) (or most other solar stocks) to see what I am talking about. However, reading the headlines from around the web, one might be misled. At Yahoo! Finance it reads "Stocks Close Higher", MSNBC says "Stocks end day higher as inflation concerns fade", and The New York Times announces "Stocks Higher After Inflation Report". While this is numerically true, I don't think those headlines fairly represent today's action.

My technical indicators are slightly bearish, but the market could very well turn around tomorrow if the bears give the bulls a chance to regroup. I will be watching very carefully, to see if the bears can gain the upper hand.

First I'd like to thank Rob at Quantifiable Edges for running the test regarding the PowerShares QQQ Trust (NASDAQ: QQQQ) and its 9-day moving average. Although the results were mixed, it did look like the longer you held the position, the better chance that it would be profitable. I will be looking for a pullback this week in the Qs to the $47 level.

Well despite my small cap stock scan turning up a decent number of potential plays, I am a little concerned about the health of small caps in general. The Russell 2000 iShares (NYSE: IWM) has yet to close above the January 2008 highs at $72.88 even thought all the other averages have already done so. In addition, the IWM pulled back last week on slightly higher volume. With that information in mind, I will be playing my small cap slingshot picks on shorter timeframes than I normally would, until things improve with the small caps.

The small cap stock list below includes stocks that are near technical levels where a long trade may be profitable.

• Enterra Energy Trust (NYSE: ENT)
• eResearchTechnology Inc. (NASDAQ: ERES)
• Metalico Inc. (AMEX: MEA)

I do have a fourth stock on my watch list. It is Advanced Micro Devices Inc. (NYSE: AMD), which is obviously not a small cap stock. I am working on another weapon for my slingshot trading arsenal and this stock appeared to be a good candidate. I will post more details in a week. For now, I will use the $6.50 level as a low-risk entry point and as support.

Good luck trading and see you Wednesday.

Despite the PowerShares QQQ Trust (NASDAQ: QQQQ) falling almost 2% today, we are right at the 9-day moving average again. As you can see, the QQQQ broke above the 9-day average in the middle of April and has yet to break below it for 15 straight trading days. The last time the QQQQ touched the 9-day moving average, a huge rally followed. Will that happen again? Maybe.

However, a quick visual scan of the chart going back to 1999 only results in one other instance, August 2000, where the 9-day moving average was not broken for 15 straight trading days. That time period was a great opportunity to get aggressively short. Will we look back at this period and say the same thing too? Let's see what tomorrow brings.

An excellent blog that I have recently found is Quantifiable Edges. I am going to request that he take a look at this and see what the statistics say.