Equity Put/Call Chart Update

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This is just a quick post showing that the equity p/c ratio averages that I have discussed and shown before have clearly turned up. This has been good confirmation in the past that a market correction is underway.

TICK Divergences

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The chart above is the TICK. I usually don't go into much detail on this, and there are several different ways I have seen to measure the TICK, to gauge whether it is confirming a trend or diverging. I am going to briefly present one simple way to look at it without having to get too complicated with spreadsheets, etc.

First off the TICK is a measurement of how many stocks traded on an uptick vs a downtick. I believe it is calculated every 6 seconds during the day. So if more stocks traded on upticks during those 6 seconds, then the TICK will be positive, and vice versa. Obviously, when stocks are trading largely on upticks relative to down, that would suggest buying interest, and vice versa. Since most trading these days is computerized "program trading", following the TICK will help you understand what direction these programs are going. For a day trader, they basically just want to go with the prevailing trend of the TICK on any given day. Short-term swing trading like I do for the blog, will want to go with the intermediate trend (10 or 20 day avg.) generally, but also may fade extremes moves away from the averages.

One thing I look for is whether some moving averages of the TICK make new highs when prices do, or if there is a waning TICK, creating a divergence. In the chart above each TICK bar is 30 minutes of trading. Then I have two moving averages which represent the 10 day average of TICK (blue) and the 1 day average (red). In order to spot divergences I typically just look at the red line (1 day avg) and see whether it makes a new high as prices do. I have two nice examples shown recently (with pink trendlines) where the TICK failed to make new highs as prices was moving to new highs. The prior one to today was June 11, which was the rally high thus far. Today there was a very similar TICK divergence, even though prices were up.

While it is yet to be seen whether this will lead to a decline, these type of divergences often lead to some degree of reversal in the following days. At any rate, you are able to objectively gauge that the program buying is less enthusiastic at this higher price than it was a day ago at a lower price. One component of the short-term model I use for the blog trades is a variation of TICK analysis. At times just an extremely high or low average TICK for the last trading day will provide a good time to go against the trend, but divergences after recent extremes are even more powerful in my experience - and that is what we are seeing right now.

So we are in the midst of a Holiday shortened week that is likely to experience low volume and we are also right in the window of the seasonal low in volatility. That may dampen any potential for big moves over the next few days, but it is hard for me to see the market marching much, if any, higher for the rest of the week. We'll see.

Possible Head and Shoulders Forming on Daily Chart

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I don't have a lot to say and may not for a couple weeks as far as the larger context of what is going on. I always try to give that context because it will help to give confidence when the short-term is set-up favorably with the longer term picture. Also, I assume most everybody is interested in the longer term market picture for investment purposes.

What I do feel pretty strongly about is that the market is unlikely to see new highs above this month's highs. This correction is taking too long and clearly has a different quality (less healthy) to it from a number of angles. However, I really don't know what to expect the next 2 weeks particularly. If a head and shoulders top on the daily chart is forming, then I would expect another decline followed by another tradable bounce up from the neckline area.

If that does occur I think it will be very difficult for most technical analysts to initially view the following/expected decline as part of a new leg down that will take the market to new lows. I assume that most will, yet again, be looking for a "retest" of the lows to form a larger head and shoulders bottom with the Nov and March lows. I would also have that in the back of my mind as a long-shot secondary scenario for the long-term picture.

From a short-term trading perspective, in times like these, when the market is trading in a range and the 20 day moving average is flat, I tend to be willing to take bullish or bearish trades on short-term extremes. As shown in the chart, if the main support at 88ish holds on the next oversold signal, that would probably be a good bullish opportunity. If/once that support is broken by a market close, I don't anticipate myself having any interest in bullish set-ups for a while. Unless the market tips its hand over the next few days, the blog posts the next couple weeks will probably be limited to entries and exits for existing or new trades.

On a separate note, I have created an options trading blog, but am unsure exactly what direction I want to go with it. I used to at times post trades that I was making on this blog, but I have tried to focus solely on equities, on only one methodology, and basically one time frame for the last year. I think that has been beneficial in a number of ways, so I don't want to digress. However, I do believe the next several months may be a great market period for directional options trading, and so I think this could be an exciting time to learn about or participate in the options market. I will probably require some feedback to decide on how to organize that blog, so I may post a poll with a few basic questions, but anyone interested may want to drop a comment with any thoughts.

Pete

Further BGZ/BGU Info

Here is a link to the Prospectus for the Direxion Funds.

Keep in mind the funds rebalance daily and are only really intended for day and short-term trading. The prospectus says they are not suitable or intended for long holding periods. The funds will perform poorly when the markets are range bound. The funds will be at their best in steady directional trends.

Pages 4 and 7 will be helpful to look at in understanding that increasing market volatility will hurt the long-term performance of both funds (BGU, BGZ).

Pages 58 and 59 explain a bit about taxes and distributions and says that the fund will announce ahead of time the div date. However, I couldn't find one posted anywhere as of now.

If anyone finds the dates or when it is made available I will place the dates on the blog so that it is easily visible for everyone. Similar for the Proshares funds (SSO, SDS, etc). Please comment if you know the div dates.

Pete

Leveraged ETF Traders Need to Know This

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First off, a reader had asked why, in practice, I don't typically immediately enter the opposing ETF when exiting a blog trade. So if I am in SDS, why not immediately enter SSO when exiting SDS? I think the idea is that you want to trade as much as you profitably can. While I have in some form or another addressed this issue in the past, if you are a consistent follower of this blog, especially if you participate in blog trades, then please read the comment section from the previous post to get some dialogue on this idea. I have decided not to make a separate post, because the basic info is already in the comment section.

Now for today I wanted to discuss some things about the Direxion 3x ETFs BGU and BGZ. I occasionally recommend these for trades on the blog in anticipation of catching a major directional market movement. However, holding these funds for the long term is a losing proposition.......if you are long. So you must be careful about holding these funds if they go against your position. They are great for day trading and for capturing leveraged moves on short market swings, but don't plan to hold these funds. And here's why....The funds are decaying over time.

The chart above is a chart of BGU, the 3x bullish fund, in candlesticks, and the S&P as a line graph for comparison. Do you see that the BGU has lost about 33% of its value since inception? Despite the S&P only being down about 2%.

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Now this chart is of BGZ and the S&P 500. Do you see that this fund is down about 43% since inception despite the S&P being down 2%? Both funds are decaying.

So while I don't have a mathematical model on how these funds are constructed, it seems that the most sensible may to play these funds for the long term, is to SHORT THEM BOTH! If you shorted them both at inception you would be up about 34% on one and 43% on the other despite the S&P going basically nowhere from start to finish.


Now if the funds both decline in value to very low levels, you probably won't get large enough % changes to make them worth shorting, but for now, it is certainly something to consider. In fact, if anyone wants to look into this further, Direxion just launched 2 new 3x funds specifically mirroring the S&P 500. The bullish fund is UPRO and the bearish fund is SPXU. So, while I am not officially recommending this, it certainly may make sense to short both these new funds for a time.


I have considered something of this nature for a while for blog purposes, but from my perspective I think I will wait until I believe the bear market is almost over, and then suggest shorting BGZ at that time, as the result would probably be a near 100% gain by the time the next major leg up in the markets gets underway. It would probably also be a decent idea to short BGU right now, if my outlook is correct on the markets falling further.


In any case, I know that most people who follow this blog probably have recognized both the benefits and dangers of these funds, but I wanted to make it very clear, and make sure that everyone knows not to get tied up in holding a losing trade for several months on these funds. Even if the market comes back your way, the fund may have decayed so much, that you never get back you investment, or the gain will be smaller than you may expect.

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.


Pete

Still Waiting for A Good Set-Up One Way or the Other

I was hoping to get an ideal set-up this afternoon for an inverse ETF play, and the short-term model came close to overbought on the Nasdaq, but the post FOMC decline pretty much wiped out the chance of getting overbought.

I really don't have a great idea of what will happen tomorrow. I tend to favor the day following the announcement to move opposite the post announcement reaction. That would suggest an up day tomorrow, or at least in the morning. Supportive of that idea, the Dow moved beneath Tueday's low today, but none of the other major indexes did. So this may be a short-term non-confirmation, indicative of more strength in the broad market. That move on the Dow set-up a decent looking potential bullish divergence on the technical indicators as well.

On the other hand, my experience tells me not expect a major rebound until the first support is broken (this being more true if the March-June rally proves to be a bear market rally). Since my perspective is that the market is now in a correction/leg down, and the very early stage at that, I think it is wise to require that the support be broken before taking any bullish trade.

When a major "pattern" completes in a market, there is usually a sustained thrust in the new direction that often entices those now accustomed to buying (or selling) small corrections against the prior trend to buy. The problem is that early (or about halfway through) in the thrust there may be a brief pause, even with a nice reversal bar, that is like Mr. Market Angler throwing the bait. Then the potential reversal fails in a dramatic way, and the hook is set. While that remains to be seen in this case, my suspiscion is that we may just be seeing bait right now.

One concept I have discussed several times on the blog, especially in the last 1 or 2 months, is that of a "measured correction." In a trend, any corrections against the larger trend will tend to be roughly similar in price and time on average. An early sign of a larger change in trend, is when a correction is larger in percent, and takes longer than the largest correction so far in the trend. As it stands now, the largest correction in the S&P before this one was 6.5% and took 5 days from high to low. The current correction has gone about 7% and is 8 days from high to low so far. So we have already seen a bigger and more time consuming correction, though only marginally. That is why I think the current level may be a "bait" area.

Bottom line - don't be surprised to see another quick and sizeable move down from here that undercuts major support at 878 on the S&P. If that move down doesn't start tomorrow, then there may a great opportunity for an inverse trade on further strength tomorrow.


Pete