Monday, November 23, 2015

The Definitive Traders Guide to Leveraged ETFs

The Definitive Traders Guide to Leveraged ETFs

There are many compiled lists of leveraged ETF's (L-ETF's) available on the internet, but not much information weeding out the good from the bad, what makes them tick, or how to actually trade these beasts, so here's my take.


L-ETF's don't trade like stocks. They're more volatile, and some are more volatile than others. If you're risk tolerance is low, then I suggest you steer clear of them all together. 
These funds are not for the inexperienced trader. If you don't know how to sell a rip to the upside in a normal index then it's unlikely you're going to have success exiting a highly volatile L-ETF.
Trading commodities offers more risk then trading equities, and L-ETF's that intend to track the underlying commodity... even more so. Funds which track highly volatile sectors such as gold miners, silver, crude oil, and biotech are also some of the most volatile, with intraday swings of 35% - 40%, being not all that uncommon. I say, "the more volatility the better", but you shouldn't feel like a total wuss for choosing to trade something a little less volatile - like the 3X leveraged S&P (for instance).


Certain ETF's I call nonperformers.  They don't track the underlying index as advertised, don't perform well, or are thinly traded (illiquid). Look at a short term chart and if you see the price action leaving gaps all over the map, Its illiquid, and that means you could have trouble finding a bid when you want out. To find some good examples of illiquid funds, take a look at some short term chart views of L-ETF's you've never heard of, like the 2X EURO bear ETF - for instance.  
A good example of a fund that doesn't perform well is the $TVIX. It doesn't even perform as well as the underlying index so you not only get the disappointing price action, but none of the reward that comes with being leveraged.

$TVIX tracks short term $VIX futures - not the $VIX - so it's also important to know what you're trading before you trade.

Overlaying the price action on the $TVIX, and comparing it to $VIX short term futures - the $VXX only then do you get a clear understanding of why this fund should be avoided entirely.

If you thought you were going to get more bang for your buck buying the $TVIX for protection, you were sorely disappointed.

Charting Leveraged ETF's

Nearly every technical indicator normally at your disposal in and index or stock is totally absent in an L-ETF chart thanks to something called NAV (a daily rebalancing of the fund). This daily rebalancing can cause the charts to become horribly skewed over time.
The daily averages on L-ETF charts don't align with those on the underlying index.
The only useful purpose I find in charting them is that the trend lines, and patterns, can offer a good guide, when looking for good entry and exit points. See the blue line on the chart above for a good example... and in some ways charting L-ETFs is a lot like charting the $VIX. These charts don't play by the same rules.
Most often I'll use the technical chart on the underlying index to determine the trade. The fact that you're trading an L-ETF only means that precise entry and exit points become more critical, as these funds tend to give back all their gains within a few days/weeks after a major reversal, as we've seen over the past few weeks in shares of Direxion's 3X leveraged technology bear $TECS (for example). See the chart below.
If you decide to hold L-ETFs over a longer period of time, it's imperative that you exit at or near capitulation points, or you risk giving back a good percentage of your gains.
These funds aren't like an index that you can buy and hold, and forget about for a while. L-ETF's are for serious, disciplined traders.
That brings up the question:

Should leveraged ETF's be held for more than a day?

Some say "no", but that is not the definitive answer. While L-ETFs will bleed value over time even in a relatively flat market, and losses will compound over time - if you are fighting the trend - as long as the trend isn't against you, and you have the fortitude to stick with the trade - without being shook out on every 10% intraday move - then I say, "why not"? Just be sure to get out at, before, or soon after, the next major reversal.   
May the trend be with you
This guide is not a recommendation to trade. Please read my bullet-proof disclaimer linked at the top of this blog

Sunday, November 22, 2015

Market wrapup week ending Nov 21st 2015 - "Best week of the year for the S&P"

"Best week of the year for the S&P"?

Saw this headline reported by CNBC, and even if that's true, it ain't saying much!
It's the Financial news networks job to pump stocks, and this is just one more, in a long list of meaningless headlines...  when you know shorts sellers are lightening up on their positions going into the long holiday week. Even the dopes at CNBC must be smart enough to know that this is exactly what you typically see this time of year, not to mention this Friday was OPEX (options expiration). Remember markets are cyclical.
The reality is that few investors are making money in this market, due to the fact that most stocks are down for the year. Market breadth stinks.
The market bounced back from it's sell-off into the Paris attacks, which we saw coming from a mile away. I thought we might see a bigger event than what we saw in Paris, but I had a sneaking suspicion "something big" was about to take place when I started tweeting that morning. Still it was surreal watching the events in Paris unfold, especially after mentioning WWIII in another tweet - before the market closed.

 The next day the Pope calls this event, "Piecemeal WWIII", but only after someone on FoxNews had already done so. This is the narrative, whether its true or not, or just another event created to destroy America from within, I still can't say for sure, but I think the latter.
Market walked down on a 5 minute chart on Friday the 13th      
This was one of the craziest weeks we've seen for a while that's for sure, but not because markets rallied.  

Thursday, November 5, 2015

Stock Market update Thursday 11/5/2015

If you were watching me tweet charts yesterday, we determined that this powerful rally is in fact a wave C, since wave 3 is ruled out when the Wilshire 5000 made a lower low (ruling out wave 2), back in Sept. So what does that mean to us as traders? It confirms that this is a snap-back rally, rather anything more sustainable. There's still the slight possibility that we're going to trade into a broadening pattern, as I tweeted earlier in the week - on a revised DOW chart - but unless and until that develops I have to continue to treat this as a sucker's rally in wave 2 (or possibly a wave b).
Looking at the Wilshire:
The pink line is where we saw yesterday's reversal - by the way. The red line is a possible target, and as I've said before "calling market tops is harder than calling bottoms".

As for the Dow it continues to hold above a channel which it never should have pierced in the first place, with the 200 day moving average currently trading trending @ 17583.

For all I know the powers that be have set some arbitrary target like DOW 18k, because they feel this will offer the market some psychological boost. I see it as a normal snapback rally, which overshot because of damage control. What I mean by that is that no sooner than the market crashed, we saw certain stocks immediately bid up to pre-crash levels as if nothing had happened. Not the plunge protection team, but anxious money managers, having an "oh shit" moment, and attempting to repair some of the damage done in the August crash. Breaking out the top of the pattern doesn't change the pattern, it only extends the rally for a few more days, and allows the PTB more time to take profits.

 Looks like we're seeing a head fake rally in futures this morning, after yesterday's reversal, and I have to assume that was a reversal, because wave 1 always looks like a harmless pull-back. Maybe we retest the highs, but this rally is already so over-extended, and I'd be an aggressive seller into any further strength.  

I wouldn't normally expect stocks to sell-off this time of year, because short sellers typically like to lighten up on their bearish positions, before they leave for the holidays, but this time could be different. after all we did see the market crash into the winter of '07 - '08. We could still see a short lived rally into OPEX, and into Thanksgiving, but a lot can happen in 2 weeks.

Energy has also extended further than expected, but this brings me to the most important point in this update. We've seen certain energy stocks extend their gains, lifting the Dow energy index to new recent highs, causing that sector to trade into an unexpected triangle pattern.

The price action also failed to interfere with the price action in what I've revised to wave "1". If this is correct then energy is headed for new recent lows.

I've revised this pattern to a wave 4 triangle which just happened to kiss the top of a bearish channel. Also, I happened to catch part of the Fast Money show on CNBC, and the ridiculous bullishness I witnessed points to an emotional wave E top.

That's all I have time for today, but Biotech also looks like it could be in a wave 4. I remains Net short that sector and gold miners as well. Maybe more on that in the next update.