Major Buying Inflow into Nasdaq ETF
Dec. 12th, 2024
Major Buying Inflow into Nasdaq ETF
When I’m sorting through a group of stocks or ETFs to identify which ones may be strong candidates to be added to my ‘Buy List’, I have a handful of technical indicators that I will use to help me filter down to the best looking setups.
Just yesterday morning, one ETF popped up on my screen that met many of my criteria and warranted being added to the ‘Buy List’.
The ETF that caught my attention was the Invesco Nasdaq 100 ETF, symbol: (QQQM).
When I saw QQQM’s stock chart, there were a number of things from a ‘technical perspective’ that I like to see. The ETF is clearly in a long-term uptrend and meets many of my technical ‘Buy’ signal indicators. However, at any given time there could be hundreds of stocks or ETFs that satisfy just these basic criteria.
Well, since this ETF meets many of my more base-level technical mile-markers, I need to have some additional tools in my tool kit to help me parse through all the signals to separate ‘the best from the rest’. So, you may be asking, “What sets this ETF apart from the rest of the bunch?”.
This is the right question! And the answer is that the ETF is not only in an unquestioned uptrend, but QQQM also has confirmed momentum in the buying pressure underwriting the ETF’s move.
Let’s check out the technical breakdown of QQQM in the chart below and I’ll tell you what in this chart has me so excited!
Looking more closely at the chart, we can clearly see that QQQM is in a definitive uptrend (circled). But what is so exciting about this chart is what’s shown in the lower portion of the chart, the ‘On Balance Volume’ line.
On Balance Volume measures volume flow with a single Easy-to-Read Line. Volume flow precedes price movement and helps sustain the price uptrend. When an ETF closes up, volume is added to the line. When an ETF closes down, volume is subtracted from the line. A cumulative total of these additions and subtractions form the OBV line.
Once I identify an ETF, like QQQM, with a clear uptrend, I will check the ETF’s OBV chart to seek confirmation of the ETF’s trend.
You can see in QQQM’s OBV chart, the ETF’s OBV line is clearly trending up which signifies that the ETF’s buying pressure is exceeding its selling pressure which validates QQQM’s ‘Buy’ signal. As long as the OBV line continues to trend upward, this provides support to help sustain the ETF’s bullish run.
How I Would Look to Trade It
Since we have now confirmed the strength of QQQM’s ‘Buy’ signal by getting confirmation from the OBV chart, now we will want to look for a potential trade to place.
Of course you could simply buy the ETF shares, which we sometimes do, but, many times when we spot a setup like this we want to add a bit more leverage to our position to unlock more explosive profit potentials.
With a setup like this, we like to find a call option to purchase which would provide us with a little more leverage on our trade. By doing this, should the bullish trend continue, our trade is positioned to produce higher profits when compared to just owning the underlying ETF shares.
When selecting which call option to purchase, I often rely on my 1% Rule to help narrow down my choice of option strikes. The 1% Rule helps me select an in-the-money option that has a higher probability of producing a profit when compared to an at-the-money or out-of-the money option. Once I have one selected I will vet the trade using my Call Option Purchase calculator to determine the trade’s profit potential.
Below is a snapshot of my Call Option Purchase Calculator that shows the profit potential analysis for my trade. This example examines a range of QQQM shares remaining flat up to a 12.5% increase at option expiration.
115.3% Profit Potential for QQQM Option
The trade analysis shows that if QQQM shares were to increase by just 1% at option expiration, this trade would make 9.5%.
Then looking at a few of the bigger potential moves, if QQQM shares were up 5.0% at option expiration, our option would be set to profit 56.5%!
If that doesn’t sound good enough, get this, if QQQM shares were up 10.0% at option expiration, this call option would be set to produce a 115.3% profit! That means the call option would outperform the ETF shares more than 11 to 1!
By following my 1% Rule to select which call options to purchase, this has helped me in the past to juice my trade’s profit potential, just like in the example shown above. Additionally, the 1% Rule helps to increase the odds that the option will profit as the underlying ETF only has to increase by 1% for the option to begin profiting.
The Hughes Optioneering Team is here to help you identify high-probability trades just like this one.
*Trading incurs risk and some people lose money trading.