Technical Picture - NASDAQ Struggling at 20 MA

The NASDAQ has pulled back to its 20-day MA. The McClellan summation in the NASDAQ has just turned red with the McClellan oscillator breaking below the zero line. The S&P is fairing a little better overall, but we could go either way. The volatility index (VIX) is working sideways and I can make out a small triangular consolidation. Gold rallied again today and is testing recent daily highs ($XAU index).

Nice Setup Relative to 5-Day MA - SRS

SRS (inverse real estate ETF) setup nicely today relative to its MAs. It opened with a WR first 15min bar which is an early indication of increased volatility. The second 15min bar closed above the 5-day SMA (orange/peach colored MA). The third 15min bar was strong and took out the 30min ORH. The next four 15min bars were a pullback that culminated with a hammer-like bar off of the previously broken 5-day SMA. The high of that bar also lined up with the 30min ORH. The entry was a rebreak of the ORH. After some resistance at the morning high, it broke out and easily hit the 62% extension of the 30min OR.

The location of the hammer-like bar (7th 15min) was in an ideal location relative to the 5-day SMA and the 15min 20EMA.

Technical Picture - Weak US Dollar, Strong Gold

The NASDAQ is still showing weakness relative to the S&P with many key indices in the vicinity of their 200-day averages (either SMA or EMA). The McClellan summations are still pointing upward . The volatility index (VIX) remains just below recent support.

The US dollar was very weak on Friday and broke below daily support (horizontal support). This drove a rally in gold with GOLD (Randgold Resources Limited) continuing to be a relative strength leader. Friday's gap up in GOLD acted as a flag pole and the first 3 hours formed a bull flag. The 12th 15min bar was a WR full-bodied candle that broke out (of the flag) and led to a nice trend move.

Tricky Leveraged ETF Behavior

Question 1: What do the ProShares UltraShort Financial ETF (SKF) and the Dow Jones U.S. Financials ETF (IYF) have in common? IYF tracks the Dow Jones U.S. Financials Index and SKF is a 2X inverse fund of the underlying index. SKF is designed to deliver approximately -2X the return of IYF (on a daily basis). So, if IYF goes down 5%, SKF should go up 10%. If IYF goes up 5%, SKF should go down 10%. Simple enough, right.

The histograms (IYF - top, SKF - bottom) illustrate the -2X nature of the returns. The distribution of SKF returns are almost a mirror (negative) image of IYF returns, but with twice the value.
Question 2: Consider the situation where IYF started this year (2009) at around $45, traded lower and now is back at $45 (first chart below). Given that SKF "tracks" IYF (but in an inverse sense), where would you expect SKF to be relative to its 2009 starting price? The second chart below may surprise you. At the start of 2009, SKF was trading just above $100. Now, with the underlying index back to even, SKF is trading around $40. It illustrates why there have been so many complaints and warnings about investing in the leveraged (bull and bear) ETFs.

Technical Picture - NASDAQ 200 Day MA

With today's weakness, the McClellan summations have gone flat. The NASDAQ continued to exhibit weakness relative to the S&P. The low of yesterday's hanging man candle in the NASDAQ was taken out today on increasing volume. This action in the NASDAQ is taken place at the 200 day MA as shown in the chart below. The market appears to be at a pivotal point.

VIX Impulse and Flag - SKF

Similar to yesterday, a gap up opening in the broad market was met with immediate selling. The difference today was that the volatility index (VIX) showed an implusive move up (flag pole) which took out the previous day's high and then formed a flag. The implications of decling and rising VIX have been discussed recently in comments.

The mid-day flag on the VIX correlated with flags in individual stocks and ETFs. SRS (inverse real estate ETF) was the %change leader on my WL. However, the mid-day "bull" flag (inverse to the market) in SRS was not clean. I found a much cleaner flag pattern on SKF (ultrashort financial ETF). The 15min charts below show the impulse and flags in VIX (left) and SKF (right). The flag in SKF setup on top of the 15min 20EMA. I partialed after three 15min bars and a trailing stop on the remainder was hit soon after.

Technical Picture - Gold Range Expansion

The broad market opened higher and immediately gave up ground. Much of the day was spent in consolidation mode. There was a noticeably divergence between the S&P (new high late in the day) and the NASDAQ (no new high late in the day). The VIX worked lower continuing to confirm the current trend. However, keep in mind that the market can and often does turn on a dime.

Gold continued its range expansion move following the breakout from the coil mentioned on Friday. The coil turned out to be the right shoulder of a small inverse H&S visible on the daily chart. However, low risk entries in individual gold stocks were tough to find today. ABX had an okay setup above the morning range high, but the risk to reward ratio based on the 62% extension of the 30min OR (a common target for me) was not favorably.