I’m a chartist to the core. That doesn’t mean I ignore other investing techniques. But it does mean that when the charts tell me a story, and I can point to a reasonable rationale for why, I take note. And I will write about it here.
Right now, I see multiple “red flags” with the chart of the UltraPro QQQ 3X ETF (TQQQ), which aims to track the popular Nasdaq QQQ Invesco ETF (QQQ). It is indicating that the market’s concerns about the combination of tariff-induced price pressures on U.S. businesses and consumers, the growing employment situation (higher unemployment claims) and the timing of the Federal Reserve’s next precious rate cut, are all weighing on investor behavior.
That is, sellers are starting to trade with more urgency than buyers. It’s still early, but it can get late quickly in this stock market. We saw that earlier this year, as the market had one of its fastest major declines on record.
Why Use TQQQ to Trade the Nasdaq-100?
Naturally, every investor must decide the trading details for themselves. But I find many do not even consider leveraged ETFs, because they’ve heard stories about holding too long and having their price erode more than expected. Or, they just don’t want to have that much loss potential (3X the QQQ via TQQQ), despite the allure of 3X upside in a strong market.
My short answers: Don’t hold too long, and don’t invest nearly as much in something like TQQQ as you would in QQQ. That’s just a quick primer. And the underlying rule for me is know what you own and do your research.
What’s TQQQ’s Story Now?
I’ve traded TQQQ a lot the past couple of years, for many reasons. That includes using options on it, with or without the ETF. And I’ll show one current option collar possibility below.
But the main takeaway from the two TQQQ charts below is that, as I’ve seen before with this ETF, since it moves three times faster than the QQQ, it can often act as a “sneak preview" of QQQ moves to come. Perhaps by a few days or a couple of weeks. It is far from foolproof, but it is about putting the odds in your favor, always. Let’s see what the charts have to tell us now.
TQQQ Shows a Familiar, Rough Pattern
In this daily chart below, I see a 20-day moving average (in red at top) that is poised to roll over. And, a PPO (lower section of chart) that just crossed over to the downside, and to a greater extent than it did earlier this summer. That last part is the “kicker” for me.
When I put those together, and look back over the past 2 years in the chart, I see that a similar look has preceded some big drops in TQQQ/QQQ. Declines of 30% to 60%, in fact.
And when I look at this chart of 3-day prices (which I’m doing because the weekly is not rolling just yet), I see that the same situation has already “bled” into this longer time frame.
Does it mean that QQQ and TQQQ are toast? No, but it’s a warning sign for sure. Markets can do crazy things, but if we play the percentages, this looks like more risk than reward to me, at the moment.
I actually do own some TQQQ currently, in small size. But with 3X ETFs, one strategy I like to consider, given that quick and large downside potential, is an option collar. I still get a lot of upside if TQQQ overcomes that technical weakness, but I can define my own worst-case scenario. Not a bad deal, I think!
How to Collar the TQQQ ETF
Here’s one collar possibility among many you can scout for as a Barchart Premier or Plus member.
With the ETF at $86.10 as I wrote this (and QQQ at $561.42), I cited a collar out to Jan. 16, with strike prices of $115 for the call and $90 for the put. Those strikes plus the net options cost produces a range of roughly $18 profit potential to $7 downside risk, or about 20.6% up to 8.4% down. That’s a 2.5:1 ratio, not bad in my book. Remember that TQQQ moves 3X as fast as QQQ, so that’s really a 7% to under 3% up/down ratio on a QQQ-equivalent basis.
By looking at collar possibilities, I can try to hang in there with the TQQQ, even with a chart I’m growing wary of. Either way, this article discussed many tools that traders can make themselves aware of and train on, with the help of Barchart.com.
