Let's Go on a Stock Market Road Trip

Let's go on a road trip!

Wait - would you even go on one without knowing where you're going in the first place?

Sometimes, random adventures can be exciting. And while trips may be taken at the spur of the moment, we're still going to need a map to get us around.

Trading the stock market is like going on a road trip - as spontaneous and drama packed as it may be, we still need a guide. And the best guide we can create for ourselves is a trading plan.

If we don't plan our trades, we position ourselves to be taken on a ride by the market instead of embracing the journey ourselves. And when Mr. Market has full control, it's usually an exhausting and costly experience for us as traders. That doesn't sound like a very fun trip to me!

To the extent that its possible, we can map out our trading plan before taking on any position in the stock market. What happens next is not up to us, but at the very least we can establish some sense of direction when going into each trade.

Last week we looked at QQQ and its seemingly nonstop rise since the April lows around $84, highlighting the fact that the 20 day Moving Average has acted as a support on two pullbacks in the month of July alone.

Let's see what happened after we mapped out our trading plan for QQQ.

QQQ: 20 Day Moving Average Fails as Support

Markets across the board took a beating on Thursday, the last day of trading for the month of July. The DIA, SPY and QQQ all closed roughly 2% down for the day.

$QQQ: PowerShares Nasdaq

When we analyzed QQQ last week, we observed that it was exhibiting greater strength on upticks versus the DIA and SPY during the market's recent trending move higher.

Interestingly, in today's sell off, QQQ was the weaker of the three indexes, closing the most in the red in percentage terms. QQQ was down 2.02%, versus DIA down 1.89% and SPY down 1.97%.

Today, QQQ closed at $95.02, sharply below both the recent $96 breakout level and the 20 day Moving Average at $95.87 (orange line on the chart).

-DMI also spiked above +DMI, indicating on the daily time frame that the bears are growling and putting up a stronger fight against the bulls.

We noted in our previous analysis that should the 20 day Moving Average fail to hold as a support on any subsequent pullback, the next areas we would be looking at on the chart would be the 50 day Moving Average and the $93 congestion zone from late June.

Conclusion

Our chart observations have served as a trading guide for us and provided a clear perspective of what may happen next for QQQ.

Moving forward, there are several possibilities to consider:

  1. QQQ may bounce back to retest the 20 day Moving Average at $95.87 and the $96 area which served as the most recent breakout level in the final weeks of July.
  2. QQQ may continue to see increased selling pressure, pushing it lower towards the 50 day Moving Average currently at $93.70.
  3. If the 50 day Moving Average does not hold on any continuation of selling pressure, we would watch for support at the $93 congestion area on the chart.

Any of the above scenarios may play out in the short term. And that's why trading the stock market is like going on a road trip - you may have an idea of what direction you'd like to go in, but Mr. Market will see to it that the stops along the way are spontaneous!

That's why having a trading guide is important, and the best trading guide is having a trading plan in advance and establishing rules to follow.

In this case, different strategies in our trading approach may need to be pursued depending on what direction the market moves, but at least we've mapped out several possibilities and are mentally prepared for them, should any of them occur.