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.