Look For a Hard Reversal This Week

Last week we provided two scenarios that could possibly take place as the QQQQ struggled with its downtrend. One scenario looked at the possibility that traders would become overly bearish and the index would stretch down to a very oversold condition setting up a great buying opportunity. The second scenario, which did in fact play out last week, had the QQQQ bouncing to relieve its already oversold condition, filling the gap, and setting up for a new leg down. So here we are. The QQQQ is making its new leg down after filling the gap at $41.50. Do we get bearish here then? No! Instead, the first scenario is now back in play. The index is now getting very oversold and it has long term trend support just below $40. Yesterday the QQQQ closed at $40.49. While this occurred 55k puts were sold and only 22k calls were purchased. In other words, options traders, who have an absolutely horrible record, are betting on a breakdown. We are betting they are not going to get it. Stated another way, dumb money is betting on a bearish case and smart money is accumulating at these levels. This week options expire and bears likely have a target on their backs. We are looking for a sharp bounce higher at some point this week. Scans today reveal that the selling pressure is not yet behind us, but QQQQ dips down to and below $40 are wonderful buying opportunities.