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Turkey Trade

11/19/07 09:14:30 AM
by Mike Carr, CMT

In years past, buying this week and selling next week could have paid for a few holiday gifts.

Security:   QQQQ
Position:   Buy

For some reason, traders seem to like holidays. There is a strong tendency for the stock market to rise in the days immediately before a holiday. This fact has been well known by traders for decades, and in fact it was written about as long ago as 1976 by Norman Fosback in the classic work Stock Market Logic. Fosback was a pioneer in technical analysis, testing trading ideas long before software was user-friendly. He found that buying two days before Thanksgiving and selling right after the holiday led to consistent profits.

Fosback tested this idea on the Standard & Poor's 500. It still works on that index, and on the Dow Jones Industrial Average (DJIA) and every other major stock market index. To get the most bang for the buck, traders can look to the NASDAQ 100, tradable as the exchange traded fund QQQQ. The specific entry and exit rules are very simple — buy at the open on the Tuesday before Thanksgiving and selling at the open on the Monday after Thanksgiving.

The QQQQs have been trading for 17 years, and this strategy would have led to 14 profitable trades. Overall, the average trade returned 1.1%, with a maximum gain of 3.4% in 1993. The largest loss was -2.0% in 1994. By dollars, trading 100 shares, the largest loss was less than $50 in 2001, after a $250 profit in 2000 (Figure 1).

FIGURE 1: QQQQ. By dollars, trading 100 shares, the largest loss was less than $50 in 2001, after a $250 profit in 2000.
Graphic provided by: Genesis Trade Navigator.
Aggressive traders can use QQQQ options, single stock futures, or the Ultra QQQ ProShares (QLD), which offers leverage to stock traders. This ETF uses futures and options seeking to attain performance that corresponds to twice the daily performance of the NASDAQ 100. No matter how the trade is executed, using a stop is important to preserve capital, especially in the current, volatile markets.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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