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Checking out QQQ3

June 8, 2022

My recent purchase of QQQ3 at $84 has moved solidly into profit, which has prompted me to take another look at what is happening. QQQ3 is an ETF (Exchange Traded Fund) which broadly tracks the Nasdaq 100, is three times leveraged and rebalanced daily. This combination of characteristics means it can perform incredibly well on the upside; much better than you would expect from the three times leverage.

Trough to peak since it was launched in 2013 QQQ3 is up 86 times. By contrast the Nasdaq 100 over the same period is up roughly four times. You can see why I am so excited about QQQ3 as an investment. The Nasdaq 100 chart is shown below. The index is showing negative on all the indicators I follow. When it turns up that will be an exciting moment for investors and a major buy signal for QQQ3, which should have its own buy signal by then.

I have been looking at QQQ3 and there is another strategy that seems to work well. At least it would have done historically. This is to buy on every green candlestick that follows a red candlestick. Since the ETF was launched there have been 25 such buy signals and if you had acted on every one you would be doing very well. This is an accumulation strategy rather than a trading strategy but it looks as though it would delver a good result.

UCITS, the European regulation which stops British investors buying US quoted ETFs, does not apply to CFDs and spread bets so an alternative to buying QQQ3 is QQQ, the unleveraged version of QQQ3, which almost exactly tracks the Nasdaq 100. You cannot buy the shares in a share account but you can buy CFDs and make spread bets. If you do this you will have a leveraged account.

You don’t have to use leverage with a leveraged account but since you will pay interest on your holding and leverage will accentuate your gains I think it makes sense to do so. As a beginner you can buy five times your equity so £100 buys £500 worth of shares of which £400 is borrowed money. You don’t have to bet the ranch. Start small and see how it goes. Treat it like a game of chess. You will win if you keep making the right moves. One simple strategy would be to buy on the blue vertical lines, which are Coppock buy signals and sell on the red verticals which are Coppock sells. Throw in the leverage and you would be surprised how well this strategy can work.

One of the difficulties in pursuing it is that you are out of the market for long periods even when it may still be rising. This can happen because even slowing upwards momentum can make Coppock turn down. It is a strategy of dipping in, making a profit, cashing in, waiting for the next buy signal, dipping in and so on. It works but requires great patience. I don’t think I could do it though I will try with some money.

The alternative is to buy on all the vertical blues and also buy on other clear chart buy signals like a break up from a pattern . On the selling side instead of selling on a Coppock sell signal you could have a bias to selling whenever the Coppock indicator is falling. This way you wait for the next broken uptrend line/ dead cross on the moving averages and then you sell. This strategy is more discretionary but I think it could well work better and requires less patience. I will do my best to keep you posted on all buy signals and important sell signals.

As it happens I won’t be investing like this myself in QQQ because my favourite instrument is the explosively geared QQQ3. I want to be in a stock that has risen 86-fold trough to peak since 2013. That is a seriously wow investment, perfect for a red-blooded investor like me who thrives on risk. I am even starting to wonder why would anyone invest in anything else. How many individual shares can match that performance. In Lee Child’s Jack Reacher books really beautiful women are described as spectacular. In investment terms I regard QQQ3 as a spectacular investment.

And imagine if you/ we can time our sales as well as our purchases so that we can sell, watch the stock fall and buy more with the same money; that is very much the dream scenario but if it worked the mind boggles at the money that could be made. I am probably getting carried away here; I often am but it is exciting.

The problem with charts, especially ones with lots of pretty lines drawn on them, is that they make trading look easier than it is. Based on the signals you think, wow, this is a licence to print money but it isn’t. We haven’t discovered the wheel here. It is just a way of making money. You have to be disciplined and you have to accept that there will be false signals.

What my strategy does, which is very important in the stock market, not least for me, is to stop taking decisions based on emotion and, as the King of Siam might have said, make the whole process scientific.

March 2020 looked like a massive breakdown but it wasn’t. As it happened I realised that, which is the common sense bit, and wrote a piece recommending buying QQQ3 in the very hour in which the market bottomed out. It was a little bit the same thinking that made me buy and recommend QQQ3 recently at $84 even though none of my indicators was saying buy. Whenever the market takes a massive tumble it makes sense to buy QQQ3 which is very volatile but won’t go bust. Worst case it goes to $20 and you buy a load more so that your average entry price is not too far from the actual price. One day it will turn higher unless it is game over for the human race. My other thinking in March 2020, which also proved correct, was that Covid-19, lockdowns and work from home would turbo charge the technology revolution so were bullish for technology shares.

Now we seem to be dealing with the hangover after that exuberant party. At any moment markets could turn. They may have turned already but absent buy signals it is impossible to know. Hence my 3B strategy that you aim to be in the stock market not to capture every scrap of rising prices but good chunks of those periods. What we could call the blue to red periods. In the red to blue periods you are out of the market and looking for other things to do which hopefully will be other blue to reds.

The safest assumption while my indicators are pointing down is that rallies will peter out and the decline will resume. Established trends can be surprisingly tenacious and buying into bear market rallies is a good way of losing money fast.

One of the reasons why my trading strategy can work even when 80pc or more of traders on IG lose money is because even with trading my approach is long-term. I use monthly charts and the signals I follow are relatively few and far between. Most of the traders on IG would regard my strategies as far too slow. At the extreme many of them are day traders trying the use the stock market’s volatility to dip in and out of the market and end the day with a cash profit. They are a bit like shopkeepers wanting to see money in the till at the end of the day. My impression is that it is extremely hard to do this with any consistency and I have no intention of even trying.

If you look on my QQ3 chart you will see that since 2013, so over a nine and a half year period, based on my indicators, there have been just seven trend line signals and six Coppock signals. This is very different to what most people on IG are doing and that is why we can win when they keep losing.

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