Nasdaq Set to Splat

I am going to start a new series where I occasionally share actionable picks related to my subscription-based newsletter Wall St. Cheat Sheet. Recently, I have been watching Nasdaq OMX Group Inc. (NDAQ). Sellers have become more aggressive since October. However, buyers have been protecting the ~$18.10 area since the start of 2009. When this happens, it sets the stage for a potential breakdown if the line of defense breaks. Psychologically, many who were buying at $18.10 and remaining calm will decide to cut losses if we head lower. Additionally, those who are profitable from the lows ($14.96) will look to lock in profits as they fear a disappearing act. When this fear-fueled supply hits the market, we are presented with a low risk trade.

In this case, the first price target is $16.57,the second is $15.65, and the third is $14.96. So, if you enter a short or put position at a break below $18.10, you will look to take profits at these targets. Of course, you should take profits whenever you want. These are just suggestions and change in real-time depending on how the market behaves (you must make those determinations because I will not be there to tell you when to sell). You can set your stop-loss at $20.50 or $21 depending on your risk tolerance and outlook for the market. Once your trade is firmly profitable, you can always lock in profits by lowering your stop-loss to first break-even and then other profit levels that make you smile.

The risk-reward for this trade is not the ideal 2-to-1, but the setup is strong. Remember, NDAQ will only breakdown if the market continues lower. In the event the rally resumes (which is possible during volatile earnings season), all bets are off for now.

I am not recommending you make this trade. I am simply sharing a trade setup that I plan to take if the market conditions dictate an edge. For example, if you got short NDAQ today in the last 5 minutes of trading, there is a reasonable chance we could open higher tomorrow. Thus, it was a high risk trade (i.e., not my style). However, if we break below the entry tomorrow morning and the markets confirm weakness, the odds are much more favorable — and this game is all about trading with the odds, and watching when they are not on your side.

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