The power of leveraged ETFs

The stock market indices have been down for the last 4 months. The peak was marked on May 2nd for this year. The trend was consistent till August 9th. The trading has been choppy since then. IWM which is a Russell 2000 index based ETF has been down ~ 20% in the last 3 months. SPY which tracks SPX has been down ~ 12% over the same period of time.

With IWM down 20%, you would expect TWM which is 2x inverse IWM to be up 40%. But, it is only up 32%. Most of the 8% loss (or decay if you call it) has been in the last 45 days since August 9th when the market was choppy. Same goes for TZA which is 3x leveraged daily ETF, tracking inverse to IWM, which is up only 41%. You would have expected TZA to be up by 60%, but it shows a decay of 19%. TNA which is 3x leveraged daily ETF tracking IWM is however down by 56%.

Also, note that the margins held in your brokerage account are 60% for 2x ETFs, 90% for 3x ETFs. These ETFs swing anywhere from 15+% to -15% on any given day. Can you take that volatility? Unless you are daytrading why would I recommend any leveraged ETF for you to hold overnight? You are better off trading plain vanilla ETFs like IWM, SPY - both long and short.

A good kiss?

Is that a sign of times to come? Trendline break and you can kiss goodbye!

Warnings bell ringing!

If you read my last post, it would have been clear to you what risk you were taking when you have an elephant in the room. Further, if you followed my trading activity, my stance should have been clear. The latest shorts I initiated (ofcourse closed at this point of time) were after my elephant post. I also warned you about the Crude oil  Keep an eye on both blogs, raise questions if you have any.

Coming to the current update, the market did not like yesterday's Fed decision and are currently as much as 10% off those levels from yesterday afternoon.

I have 2 important things for you to look for:

1, Eur/ USD: Euro assumes a lot of significance in the wake of the current crisis with the PIIGS countries and European banks.

Eur/ USD is at a critical inflection point, yet again within a few days. A break below ~ 1.34, we are looking to go down deeper. Supports remain at 1.31, 1.304, 1.28 but those are not strong supports as much as 1.342 is.

2, Below is the SPX chart which serves as a very long term guide. If you look at the chart, notice that the RSI(14) is below 50 in bear markets, above 50 in bull markets. I take the 50 period moving average and 200 period average on any chart seriously. You can clearly see that the recent market crash stopped at the 200 monthly moving average. A small note about the 200 monthly moving average: If you notice the chart, the downside acceleration increased after SPX crossed the 50 MA below in 2008 and now. At that time in 2008, the 200 MA was still rising. But, the 200 MA now started becoming flat, which is an ominous sign that the bull market is ending. I was short the market from ~ 1200 on the SPX but closed all of them today. I will enter the shorts should SPX break 200 MMA with a stop above it. I will go long the market if SPX closes above 1155 with a stop. 

I don't recommend playing the market between SPX 1105 - 1150 unless compelling.

The above charts are very very simple, clear and concise as they can get. No complicated indicators, no trendlines, pitchforks. It pays to keep it simple sometimes and follow adequate market discipline. I always say market discipline weighs more on your trading account than anything else. Good luck trading to you!

Elephant in the room

I have looked at all the charts after a 4 day rally, and it looks like the rally is sustainable for further north until conditions change. There is a new optimism among bloggers and traders about this rally and going north from here. There is also a conference of European finance ministers today. Tim Geithner is attending the conference as well. Suddenly, everything seems fine. If there is one thing that we are ignoring, it is the elephant in the room. 

On September 8th, I posted that Eur/ USD broke down. The equity markets took the elevator down following Euro. Both the currency pair and the market rallied for the last 3 days and reversed the course. We are at a tipping point again at this time. From the chart, it is clear that Euro is trying to break in again. Euro traded in a box for 4 - 5 months before breaking down. That was a prolonged consolidation and it is not easy to break above again in a whim.

What next? Considering the difficulty for Euro to break into the box again, we must assume that the equity markets will drop the correlation with Euro and rally against the Euro. However, that would be like ignoring the elephant in the room. 

The best thing to do is to select and buy stocks with perfect balance sheet, no debt, and big caps. Buy the strong ones always, as they tend to go up 1st and most. Weak ones are left behind. Since our strategy is to keep working against the elephant, it is best to keep the stops tight at 3%.  I know it is hard to trade with tight stops, in this volatile market environment. But, it is better always to get stopped rather than losing the trade by big amount. That is called market discipline, which you must follow in a volatile environment or not.

NetFlix Inc.

NetFlix Inc. announced that it is cutting its 3rd qtr. subscription guidance by 1 million. Looking for a technical standpoint on its security, currently (in premarket) NFLX is trading at 182$.

The lower trendline of the channel dates back to late 2008. If NFLX closes the day below ~ 180$, you can safely short the stock. If the channel holds, buy above 180$ with a 5% stop.

Time for chop to end

Crude oil formed a nice bear flag for the last 24 sessions. It is about to end tomorrow +/- 2 sessions. My target lower is 75 - 77$.

Circled in the figure are the previous chops, before resolution to the downside.

Trendline update

Update on the trendline that I mentioned in my previous post. Yesterday before close, the market ramped up heavily, to the tune of 1.5 - 2.5% depending on which index you are looking at, creating a "bullish reveral" like scenario. It seemed to me that the trendline broke above, but at this time I see a trendline break below again. Other than that trendline break above, none of the other indicators broke to the upside. One point to note at this time is, the Composite index (NASDAQ100) did not break down on Thursday last week, courtesy of big names like AAPL, AMZN, etc.

At this hour again, the emini SP futures broke below. Why this sudden drop (as seen in the charts) of 20 /ES points in 30 mins? Apparently, BNP Paribas exec tells the press that US market funds are not lending anymore. The business channels are not telecast at this hour, so I cannot confirm this news.

Market taste

The market taste is sour and bitter testing both the bulls and the bears. I believe we will continue to test that trendline for the next 2 days as we work off the oversold condition. The trend is down. I am invested short 20% only with covered puts. Net net, I should see the profits by the end of this week. Crossing above the trendline is only one of the indicators I will be looking for a trend change to bullish, but there are lot more indicators.

Choosing an index to trade?

In this blogpost, you will find
1, When do I prefer to trade individual stocks/ securities?
2, What ETFs do I use to trade? Which index do I prefer and why?
3, Can we use leveraged ETFs?

When VIX is below 20, I would like to trade individual stocks on an Intermediate term. When VIX is above 50, I would like to start nibbling at individual stocks increasing position size as VIX increases for the long term. When VIX is between 20 and 50, I am comfortable trading for the short term, more into ETFs. I defined my short term, Intermediate term, and Long term trades here.

If your total portfolio capital is small (say 5000$), trading ETFs will help as you need not be scared about volatile swings in the individual item and face loss. For example, if you have a stock XYZ in your portfolio, and that company posted bad news, earnings result, or downgrade by analyst, and it went down by 10%, you will face a haircut of 500$ which is significant for a 5,000$ capital. To make it back is not easy. I personally would be uncomfortable trading individual stocks if my capital is small. If you trade ETFs, you don't have to worry about news, patents, product releases, earnings reports, downgrades. If you trade ETFs, you can save time by analyzing the general market trend instead of going through all the above. Whether your capital is small or big, I prefer ETFs unless you have a compelling arguement where you stand by your own risk.

If I choose to trade the major indices, I prefer the SPX via SPY or the Russell 2000 index via IWM.

SPY and IWM match my preferences for
1, Being highly liquid: You always need to buy a stock or ETF which is highly liquid and highly traded. Highly traded means you have narrow bid x ask spread and which will give you a chance to get out at any point of time, even during extended hours - should there be a high gap up or down (for or against your position). Unless compelling and long term investment, you never want to be in a stock which doesn't trade much in extended hours. Our goal is to have control on every penny of our money, as much as we can.

2, Basket of stocks: SPY represents SPX which is an index of 500 stocks. SPX's price is not influenced by one of the stocks ever. Same with IWM. On the other hand, NASDAQ100 via QQQ has giant market cap names like AAPL, GOOG, QCOM, AMZN which form 50-60% of the index. One of those names can easily influence the sway to one side on major news on these companies which will mean that the technicals basing on which we buy or sell the index is thrown to the dustbin. In the same way, $DJI also consists of only 30 names which means one of them could easily influence the index.

I prefer SPY and IWM for that reason. If you are comfortable with a high beta, go with IWM. Otherwise SPY should just do fine. Great people master simple things perfectly, they don't master perfect things.

I don't recommend trading leveraged ETFs, I may trade on my own but that is at my own risk. If you see me buying TNA (which is 3x daily bullish IWM), then my recomendation would be for you to buy IWM.

Gap down?

                                          What happens if it gaps down? Say goodbye to the chart! Have a good weekend, it was a wonderful week at Silver Ven. We got a chance to be riding on Silver's charm this week again. ;)

Eur/USD

The above currency pair needs to rally above that line there. Without that, the market's recent rally will not hold. Add to that, the market internals are very bad today.

Taking note of strong currency moves....

Currency moves are often related to the equity market movements. Note how the market rallied after a reversal by the currency pair above. Should the breakout become invalid,  I will post an update. Be careful if you are short the equity markets.