Compression

The QQQQs and NDX have started to compress into a narrow range.  This usually foretells a big move one way or the other is about to commence. 

One of my favorite indicators comes from the TradeStation User board called NickMBigMove. It was developed by a trader by the screename of NickM001 and it signals when the Keltner Channels trade within the Bollinger Bands.  You’ll have to go to the site for the full explanation but the indicator basically signals when the market is "compressed" and are about to break one way or the other.  It’s currently giving a "compression" signal on the NDX.  I’ve also added the indicator du jour – Choppiness or Fractal Dimension – to my Tradestation screen which indicates that the market is compressed when it’s over 60.  The NDX is right below 60 on the daily chart. 

The recent rally in the NASDAQ has been very weak.  And although the QQQQs seem to be indicating that the market wants to fall, I wouldn’t be making a bearish bet at this point.  Bearish sentiment has been rising – the put call ratios have been climbing and bearish sentiment has been increasing.  Therefore, if this bearish sentiment starts unwinding, it could cause a sharp spike higher.

Since it’s still difficult to tell which way the market will break and the market is compressed, the best strategy for playing the QQQQs would be to buy a straddle. The long straddle position involves purchasing the same number of call and put options at the same strike price with the same expiration date. In this way, you can take advantage of any sudden movement in the stock price regardless of direction.