Thursday, June 25, 2009

New SDS Trade

As discussed in the post last night, further strength today has created a potentially nice set-up for an inverse trade. The Nasdaq short-term model is just hitting the overbought region. The S&P is almost there, but not quite. However, short-term technical indicators (15 and 30 min stochastics, RSI, MACD) are hinting at overbought with bearish divergence, which makes me feel that any upside is limited. I feel that the current set-up provides a quality bearish ETF entry.

New Trade Recommendation:

Buy SDS today with a market order. Current price is 55.69 which will be the blog entry price.



  1. QQQQ short-term model is way overbought now. The S&P model is just now touching overbought, so both are overbought.

    S&P intraday cumulative TICK is reaching the levels that have been good markers of stalling or topping.

    Very short-term charts (3 and 5 min) showing strong divergence suggesting things should flatten out for a while today, or maybe even reverse.

    30 minute indicators all overbought as well.

  2. Pete,

    Intuitively the premise by this question is a bad idea to me, but for educational purposes I wanted to understand the technical reasons:

    If our short term directional trades are mainly based on short term overbought/oversold signals (and perhaps that premise is what is incorrect), why do we not immediately roll a directional trade sell into the correponding opposite direction buy?

    Thanks again for your blog! I learn much more here than watching CNBC's bull-biased coverage all day :)

  3. First I want to make sure I understand you question. Then if so, I will make a post to try to help explain the rationale.

    Are you wondering why I don't immediately suggest a trade on SSO (or other bullish ETF) immediately after exiting an SDS (or other beraish ETF) trade? and vice versa.

    I will make a post addressing this issue. but if that is not your question, then please comment again to clarify.

    For a quick answer.......

    I only typically suggest trades in the direction of the 20 day moving average.

    So if that average is pointed up, then I usually will not suggest bearish trades even if the market is overbought.

    If that average is pointed down, then I usually only am suggesting bearish trades and don't act on the oversold signals.

    If the average is basically flat, then I will usually give about equal preference to both bullish or bearish trades and would be willing to immediately go the opposite way.

    there are times (like a good portion of the last 2 months) where based on my own personal longer term outlook, I will try to "pick" a top or bottom, and trade against the 20 day avg. The factors that go into my long term outlook are longer term sentiment data and large scale price patterns.

    Right now, despite the huge rally in stocks since March, I still interpret this as a longer term bear market. That simple fact/opinion has skewed my suggestions toward bearish trades for the last year, in retrospect more than was justified during the last 2 months. But I do believe the tide is turning back down now.

  4. Pete,

    Thanks for your answer... you were spot on with the nature of my question (why not sell SSO right into SDS and vis versa, immediately and repeatedly over and over again).

    I know your trading rationales take into account many dimensions and you explain them well in the blog. When I first begain playing with leveraged ETFs a number of months ago I wondered if it would be possible to accurately place the transition trade between two directional ETFs repeatedly (in my case I was looking at FAS/FAZ) but quickly learned that can be a bit dangerous if the rationalle behind the transition points is unfounded or otherwise flawed.

    Thanks again for your great blog,
    - Bill

  5. If the trades on the blog were all longer term in nature, then I would consider immediately reversing positions when exiting more often.

    As a very bare bones answer to why I don't do that short-term, the main reason is that when the market is in a strong trend, the pullbacks against the trend may not be strong enough to push the models I use for the trades, back to the opposite extreme. So in that case you would have to be a lot more careful about setting protective stops, etc. My goal with the blog is to as much as possible have completely OBJECTIVE entries and exits using one model only. So I try as much as possible to avoid entering trades where there may not be an objective exit signal from the model to get out at a profit.

    When trying to pick a top or bottom, I will often suggest a stop for the very reason above - If I am wrong, the market may continue in the other direction too long to let me get out at a profit by the time the next objective signal comes.