When should I take profits on QQQ?

On the first trading day of 2012 the exchange traded fund QQQ broke out of a two month triangle consolidation. If you bought this ETF on the breakout day, you are now sitting on a paper profit of 13%. Here is the chart with the triangle in blue and a steadily rising trend line in green:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - 2/28/12

 



  This trend has been going steady now for two months. How high will it go? I have no idea. That is why I need a plan for when to take profits and when to hold on. These rises often last for 5 - 12 months, but there can be some corrections along the way. One of the best ways to hold on to your profits is to use the moving average convergence / divergence, or MACD, indicator in conjunction with the rising trend line. The MACD indicator is a momentum indicator showing if the trend is getting weaker or stronger. When the black line passes above the red line on the MACD plot, the trend is getting stronger. When the red line is on top, the trend is weakening. This is also shown as a negative reading in the histogram (blue bars). As long as the black line is on top, just keep drawing a trend line connecting the lowest daily lows to each other. When the red line is on top, as it is in the chart above, and the closing price goes below the trend line, it is time to sell. The ten day moving average, which is plotted on the chart above, can be used in place of the trend line. Just sell when the stock closes below the ten day moving average and the MACD is negative.

Here is an example from 2010:

 Chart courtesy of StockCharts.com

Six month chart of QQQ - November 2010




The triangle breakout occurred on September 13 in the chart above. The lower green trend line is drawn from low to low as long as the MACD is positive. If the MACD goes negative and the trend line is broken, as happened on October 4, that is a sell. In this case, the sell may have been inadvisable because it was just testing the support of the old high (lower black line). If you sold, a new buy was possible when prices broke above the last high (upper black line) and the MACD went positive. This happened on October 13. Finally, on November 11, the trend line was broken and the MACD was negative for a sell.
MACD is especially useful after a big pattern breakout, like the triangles above, but can get tough to use in a choppy market.
Happy trading.