QQQQ Crash Trade Triggers Again

"I know of no way of judging of the future but by the past." -- Patrick Henry, 1775

"Past performance is no guarantee of future results" -- legal jargon attached to all hedge fund marketing materials.

I've been writing about the QQQQ Crash system since early 2003.

The basic idea is that if the QQQQs, the volatile ETF representing the Nasdaq 100 index, make a sharp move down, then mean reversion will eventually kick in and bring the index back up. In other words, whenever people are panicking, that's the time to get in. The move is not always a huge move but it's been reliable.

When I first wrote about the system in May 2003, it had triggered 40 times in the history of the QQQQs and had resulted in 40 successful trades for an average return of 2.55% per trade. The crash trade has triggered 16 times since then, and it is now up to 56 out of 56 successful trades with an average return of 1.81% return per trade. The success has kept up but because of the lower volatility of the markets, the average return has gone down.

The specific rules are:

• Buy when the price of Nasdaq-100 Trust (QQQQ - commentary - Cramer's Take) closes 1.5 standard deviations below the 10-day moving average of the low price of each day. To calculate this, you can use the lower Bollinger Band using a 10-day moving average, 1.5 standard deviations and the price series of the lows of each day.

• Sell at either a loss after 20 days or on any day that the QQQQ closes higher than the entry.

At the close Wednesday, the lower Bollinger band (1.5 standard deviations below the 10-day moving average) hit $38.62, and the QQQQs closed below that, at 38.50, triggering the system for a buy at the open today. In the chart below, the green line represents the lower Bollinger band.

The way I would play this now is to leg into it. Take a partial position at the entry price and then average down if the trade lasts for more than one day.

If the QQQQs close higher than the entry on day one then so be it. Take the profit and go on to the next trade. If the QQQQs close lower, then start to take a more full position and get a better average price than the system price.

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James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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