The thinking: I believe we are really close to another peak in the market, one that may hold for the rest of the year, and while everyone wants to be in technology and loves the FAANG stocks, there comes a point where the valuations are too stretched and the price just doesn’t make sense. I think we are reaching that point.
Whenever the market shows any signs of cracking right now, the QQQ – the PowerShares QQQ ETF – breaks down quickly. People are selling the FAANG stocks – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (Alphabet Inc., GOOG) – on every hint of bad news right now.
The technicals: The market keeps making lower highs. It rebounds off the lows it’s making, but it is not getting past the old highs. That’s not likely to change as we get into September and October, historically two challenging months for the market.
I think QQQ could re-test Tuesday’s low of $141 or even pass that and get down to $140; that’s not a big move, but the charts say you’re more likely to see a 2 percent drop here than you are a 2 percent gain.
The play: With that in mind, I have established a half-position in Sept. 8 $144 puts, having purchased 200 contracts over the last two days.
I’m looking to add another 200 contracts; I’ll do it if I see the QQQ make a new high and re-test it a few times today.
I’ll exit this play if QQQ trades above $145 or if I am down 50 percent in the trade between now and next week. No matter how it turns out, however, I’ll be watching the QQQ and the tech stocks expecting to see them step back any time there’s news through the end of the year.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using options and leveraged ETFs. At the time this was published on RagingBull.com, he held 200 Sept. 8 $144 put options on QQQ, and was planning to add to that position as described in this commentary.