SDS Trade Exit

I am going to post a trade exit on the open SDS trade from July here at 34.33. Pessimism is relatively high, and I feel there is likely a better chance to reload on inverse funds in the not too distant future.

SDS Trade Exit

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The S&P rose all day after the first couple minutes. On this cash chart this created a nice looking hammer candlestick. From a pure charting perspective, I really like this for a bullish set-up and long trade. The intraday low went below the Feb low possibly running some stops there. That may bring a reprieve to the selling at least short-term.

Click on Chart to Enlarge

This chart is of SPY which is the ETF that tracks the SPX. Notice the different candlestick pattern because the cash index SPX is calculated differently because not all stocks in the S&P open for trading at the same time. Some are delayed 10-15 min, so the cash index will not always look like the ETF.

SPY made a belt hold or meeting line candlestick today which is a bullish candlestick, but not one of the stronger reversals. However, since the market did not accelerate down after the big gap down and it closed above the Feb low and Friday's low, I don't want to remain in SDS for the short term.

I think the best opportunity will come with a move up into next week that fills the gap down around 112.00 as a place to short/inverse. The problem with going long here is I think the stop has to go below today's low for a swing trade. That's about $4 risk. But the flash crash closing low and that first unfilled gap are only about $4 above today's close. So the risk to reward is not that good.

I am tempted to get long here, but will just exit the SDS and see if there is a rebound and how strong it is. Then we can either short at higher levels or look to go long after a pullback to a higher low.

Place a limit order of 35.53 for tomorrow to exit the open short-term SDS trade.

Crash Warning

With a large gap down indicated this morning, I just want to suggest as I did previously that if the market goes below Friday's low, that will be out of character for a normal market - it SHOULD rebound. While probably the most likely thing is for a big gap down and then buyers come in right away or later in the day, I believe this could end up in a big single or multi day selling panic.

I want to be part of that on the downside and I believe the risk reward is reasonable to enter at the open with stops corresponding to yesterdays lows in the inverse funds. The S&P 500 right now is projected to open around 105.00 which is below Friday's low. If trading SPY short I would have a stop at 109.50ish. I personally am going to recommend a buy on SDS with a corresponding stop.

New Blog Trade:

Buy SDS at the open and then place a stop at 34.50 immediately after entry. For better or worse this will be volatile, so make sure the position size is appropriate.

SPXU Trade Exit

The open yesterday was 35.83 which is the trade exit price for SPXU.

Just a Heads Up

This post is a just-in-case post for a scenario where the market gaps down big tomorrow and doesn't appear to follow through on this rebound.

If there is a big gap down indicated tomorrow, then I would suggest removing the sell limit order on SPXU and place a stop instead at 34.85ish/Friday's low. The market/S&P 500 SHOULD hold Friday's low for at least several days. If it doesn't then I truly believe there is a chance for a "crash" type scenario.

I have looked at charts of several countries' stock indexes, and I do think a sharp rebound is most likely, but I just want to have a general plan if that doesn't take place. I may post in the AM tomorrow.

Currency Update

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The charts above show that there is extreme pessimism against the Euro, and that the smart money commercial traders have built huge long positions in the Euro. Based on these alone we have to be skeptical of any further significant gains in the US dollar versus the Euro in coming weeks. The advance has been large and swift, but looks to be ready to give back some gains.

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This chart shows that the weekly RSI on the FXE euro trust ETF is very oversold and formed a reasonable weekly reversal at support. This added to the above data could actually indicate a long trade in the Euro with a stop below this week's low in FXE.

If the Euro bounces I expect grains to gain to, as they are basing in oversold regions and coming off very negative sentiment which should be a contrary trader's time to look for long entries.

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The Japanese Yen looks ready to move up now. I find this interesting because Japan and the US are two of the bigger more stable economies in the world. And Japan also has low interest rates and has been victim to carry trade currency losses. So in the recent move up in the US dollar, I thought maybe the Yen would gain too. But it only now looks ready. Maybe there is some sort of rotation going on here, but it seems like for those looking to play the fundamentals of the carry trade unwind, then going long the Yen here may be the way to do it, and give the US dollar a chance to settle down now that it has risen so much the last few months.

Expecting a Rebound for 1-2 Weeks; SPXU Trade Exit Order

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Given the bearish sentiment (short to intermediate term) last week and the bullish candlestick pattern on Friday, I expect the market to rebound from this level for 1-2 weeks before continuing lower. Several sector ETF's made bullish engulfing patterns, and some made piercing patterns.

One thing to watch from a market direction/logic point of view is whether the market could retrace the last 7 day down swing in less time than it took to form. If not, then that should indicate the market is still in a larger downtrend mode. I see a few ways to view this as a pattern integrated into the larger picture, and basically they are that there is more time and probable downside before an intermediate term (multi-week) bottom should be in place.

SPXU Trade Exit Order:

Place a day only limit order of 35.00 to sell the open SPXU trade.