Technical Picture - Jamie Due Back!

For the most part, the market exhibited range bound trading for the last couple of days as expected with options expiration. There is a nice 2-3 day consolidation pattern, especially in the NASDAQ. The McClellan summations are sloping downward in both the NASDAQ and S&P, and the McClellan oscillators are below zero after breaking down from consolidation patterns. Next week should offer a range expansion opportunity.

The volatility index (VIX) showed some life with today's selling (more selling in S&P than NASDAQ). There has been a role reversal during the last couple of days with the S&P now appearing weaker relative to the NASDAQ. The US dollar is testing daily support and gold is testing daily resistance.

The best news is that Jamie (Wall Street Warrior) is due back this weekend from his extended vacation. Hopefully he will be back to trading and posting next week. For new readers (6 weeks or less), I am just a part-timer trying to fill the void. You are in for a real treat when Jamie starts posting trades and analysis again.

Technical Picture

Today's gap down and weakness clearly turned the McClellan indicators (summations and oscillators) down in both the NASDAQ and S&P. The volatility index had a pop due to the weak open, but did not show significant vigor throughout the session. The gold index tested the previous daily pivot (resistance) and bounced off; this action in gold correlated with a mildly positive day for the US dollar.

Combo Confidence - SRS

The gap down open and overall weakness in the broad market produces gap ups in several inverse ETFs on my WL. I noticed the perfect combo for trading SRS (inverse Real Estate ETF). Early in the session, SRS was the %change leader on my WL and VNO (Vornado Realty Trust) was near the bottom based on %change. Additionally, with SRS trading at/above the PDH, the daily chart (left) looked great.

My first entry was a strong full b0died candle closing above the 50% Fib level of the 30min OR. I was stopped out following consolidation at the ORH. The long upper tail on the first 15min bar was not easy to overcome. Two bar later the ORH was decisively taken out with another strong full-bodied candle. After some chop, the traded carried to the 62% extension of the 30min OR. The second trade never violated the ORH.

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.