Technology stocks are under pressure again as investors face the end of the Federal Reserve’s Quantitative Easing measures. The chart below of the ETF “QQQ” illustrates the dangerous position technology stocks are facing.
Do prices collapse from here, or do we get a solid bottom and begin a new rally?
To be sure, that’s anyone’s guess right now. However, if you are chomping at the bit to buy technology stocks this is actually a good time to analyze the technical setup. Of course, this relies on sound risk management principles.
If I was eager to buy technology stocks today, this is how I would setup my entry point, including risk parameters.
First of all, two key support levels jump out on the chart, besides the one marked in green. One support level is at ~$325 and the other is ~$300. Likewise, the 10day moving average is falling fast and currently at ~$346.50. Given these levels, you can setup conditions to enter a buy order and set the stop-loss level.
Entry
Obviously, it’s very difficult to pull the trigger and buy given this setup. I realize that. But, successful investing is all about assessing and minimizing risk. So, in this case you can either just buy at the market, or wait for a bounce. If you decide to wait for a bounce, a simple condition would be to buy on a successful close above the 10 day moving average (level stated above). I would not buy at the market, ever!
I like the idea of waiting for confirmation that the trend has changed to bull mode. Of course, the 10 day moving average signal could be false, but that’s just part of trading.
Exit
Assuming price moves in the right direction and we execute our buy order, now what? Well, we still could get pummeled if downward pressure returns. Surely, this is why smart traders set stop loss levels. In this case, the stops are clearly defined at support levels: $334, $325 and $300.
In my experience, round numbers act like magnets. So, I could easily see price challenge these levels. But what’s important is how price reacts once these levels are reached.
Another key point is to set stop loss levels a least one half the average daily trading range. In the case of the QQQs, this is ~$8.75. So, if you bought at $334 and decided the $325 stop level is appropriate, you’d set the stop loss at $320.63. If the trade went sour, the loss would be about 4%.
On the flip side, if a new rally gets underway you’re sitting pretty. From here, I’d ratchet up the stop level as the rally gets underway and matures. This way you stay objective and never let profits evaporate away.
Conclusion
In summary, technology stocks are under pressure again as investors face the end of the Federal Reserve’s Quantitative Easing measures. The big question, is now a good time to buy technology stocks? The final answer is no one knows. For sure, the $334.15 price level is key support for the bulls.
- Wait for bullish confirmation before buying
- Set stop loss level
- Ride the trend higher for a profit, or get stopped out with a small loss
At any rate, be patient and map out the support and resistance level before making any investments or trades. The hallmark of a successful investor is the ability to stay objective and true to sound risk management techniques. This way you never face the risk of ruin.
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Further reading: My definition of a fear trade –>
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