SDS

[David Randolph]

This SDS product is a leveraged product, and I don't like leverage. But since the object of the leverage is the S&P500, that is, not a very volatile index, I think SDS is appropriate.

The justification for this trade is my expectation of a consumer retrenchment in the US later in the year. The full story is on the Correction or Bear Market article.

I want to have some more short exposure than this, and that will involve selling individual stocks short, but I still need to study more and wait for confirmation before adding more exposure to this bear case.

For today this will do.

Trading Plan:

Buy 6.66% of capital in SDS.

[nullzero]

Also check out the SRS if you are bearish on real estate. Its a Inverse Real Estate ETF with double levered.

[David Randolph]

Also check out the SRS if you are bearish on real estate. Its a Inverse Real Estate ETF with double levered.

Thanks nullzero. I'm bearish on real estate, but not all that bearish. Housing prices are very rigid, even in economic downturns. Also, real estate stocks are trading at very low revenue and earnings multiples.

But they will probably go down with the rest (if I'm right), good luck

[David Randolph]

SDS is an inverse derivative product, and short term candlestick analysis wouldn't work on it because bull and bear patterns differ in their nature.

The S&P500 index itself chart also isn't good from a candlestick theory point of view, where the opening price is important, because the opening on the S&P500 isn't calculated correctly. For example, yesterday the market opened sharply lower, but if you look at the $SPX chart it says the open was unchanged.

The most accurate reflection of the S&P 500 is another derivative product, the SPY, the S&P 500 tracker stock. So I'll use the SPY for these updates.

The most important value for the short term, in my opinion, is $141.69 on the SPY. That is the midpoint of the huge red candle we had on Tuesday (the midpoint is calculated using the open and close values, it ignores the high and low of the day). For as long as the SPY closes below that level, the market is short term bearish and due for another leg down.

The last 3 days pattern resumes into a Thrusting candlestick pattern, which is a bearish continuation pattern: http://hotcandlestick.com/directory/Bearish%20Thrusting.htm

(there's more to this, if you want to learn about candlesticks, my recommendation is Candlestick Charting Explained by Gregory L. Morris).

I'll continue holding SDS.

[berloga]

I agree that it is relatively safe to hold SDS for now. However, IMHO it could be a good idea to stay on the side line for a bit to let things settle down before filling up the portfolio again. I can move my $5000 from one stock and quickly transfer it to another; for a large fund it will take a while to sell and transfer if they intend to do that. This gives us a pause.

[David Randolph]

I agree that it is relatively safe to hold SDS for now. However, IMHO it could be a good idea to stay on the side line for a bit to let things settle down before filling up the portfolio again. I can move my $5000 from one stock and quickly transfer it to another; for a large fund it will take a while to sell and transfer if they intend to do that. This gives us a pause.

Thanks for your view berloga. My take is the market may pause, but it may also go down 5 - 10% next week and then there will be a rebound, as bear markets have many and intense rebounds. If I take too long to open shorts I may risk opening them at a short term low.

The thrusting candlestick pattern that I talked about on the previous update was confirmed on Friday, with a red candle on the SPY. This means a continuation of the short term bearish trend.

Moreover, volume has been extremely high for the last four sessions. There are many buyers and sellers in this area. I believe these buyers represent the last chance of a sale near the top.

I'll continue holding SDS, a derivative product that represents the inverse of the S&P500 with two times leverage.

[David Randolph]

Yesterday the SPY opened with a gap down, recovered to close that gap and ended the session at the lows of the day.

But today the market is set to open sharply higher, as the S&P 500 futures are up 0.85%, as I write. Higher opens and lower closes are the main characteristic of a bear trend.

We'll see if the bearish trend continues or not after today's higher open. Either way, I'll continue holding my SDS longs (inverse the S&P500 with two times leverage), I know my hands need to be strong to win.

[David Randolph]

Yesterday we had what felt like a big snap back up on the general market, but as I look to the chart, it doesn't seem like a big deal after all. Asia didn't thought it was a big deal either, since it went down overnight.

For as long as the SPY's close below $141.69, the bears are in control of the situation and lower prices are to be expected.

I'll continue holding SDS.

[David Randolph]

The market is about to open higher, and perhaps it will test the crucial $141.69 level on the SPY over the morning session. As I get more and more information, I'm a bit worried about my bearish stance, as it seems I have too much company to be right (if most people is bearish, who is left to sell?).

What seems apparent to me is that there will be a consumer led slowdown in the US, and perhaps a recession. That is a serious issue for the World, since US Consumption accounts for 20% of the World's GDP.

But being worried about a Chinese slowdown due to a fall in exports isn't perhaps the best forecast, because exports account for just 20% of China's economy (hard to believe, but true). Investment spending accounts for 45% (which is incredible) and Consumption is just 35% (for the US economy it is double that).

So, the risks lie in the US consumer and the Chinese investment boom. The upside lies on the Chinese consumer, since their savings rate is something like 50% of disposable income (because they fear about the future, they almost don't have social security there).

How these imbalances will play out on the market ... I have doubts. But I see worries about the US consumer perhaps somewhat priced in you know? Banks are trading at 10 times earnings. As for the housing sector, ok, we had these big problems with subprime lenders and perhaps there's more to come, but, isn't that priced in too? Or the perceived undervaluation is just a sign of bad things to come?

I have doubts. My bear hand isn't as strong as I would like it to be. The risk is that I lose something like 3 to 4% on this SDS trade. That's not much. And for profit potential, I believe the market should at least go down to somewhere below the 200 days moving average, that means a further 3.5% decline or about 7% upside potential for the SDS.

The trading plan is:

HOLD SDS for as long as the SPY isn't set to close above $141.69.

[David Randolph]

The employment report that will be out at 8:30 EST will probably set the tone for today's opening, at least.

What I wrote yesterday in terms of feeling and trading plan continues to be adequate today:

I have doubts. My bear hand isn't as strong as I would like it to be. The risk is that I lose something like 3 to 4% on this SDS trade. That's not much. And for profit potential, I believe the market should at least go down to somewhere below the 200 days moving average, that means a further 3.5% decline or about 7% upside potential for the SDS.

The trading plan is:

HOLD SDS for as long as the SPY isn't set to close above $141.69.

[David Randolph]

The market approached the $141.69 "line on the sand", and came off a bit on Friday. I believe there's too much conflicting information to get a good feel on what the market will do over the short/medium term.

It can surpass that important psychological level (the midpoint of the big day's red candle) and just head to new highs. Or it can have another leg down to touch the 200 days moving average, standing at $134.87). I'm used to have a strong opinion about market direction, but this time as I got more and more data, I'm not able to get to a conclusion, I'm sorry.

So I'll play this carefully, that is, limiting risk. The trading plan is:

1) Sell SDS with a nice profit if/when the SPY touches the 200 days moving average support;
2) Sell SDS with a small loss if the SPY is set to close above $141.69.

[David Randolph]

Futures seem to be in for a rough start this morning, which I welcome, since I'm mostly short on the Main Portfolio. The SPY continues to trade below the $141.69 key resistance level, so I'll continue holding SDS long (an inverse S&P 500 derivative product with two times leverage).

Just to make things clear, since I read some doubts about this trading plan, I'll continue holding SDS long for as long as the SPY is set to close below the $141.69 level (or I'll get out with a nice profit around the 200 days SMA). This means I'll sell SDS only if, say 10 minutes before the close, the SPY is trading above $141.69, understood?

If you have any doubts, just ask as a reply to this post, thank you

[David Randolph]

The SPY had a red marubozu yesterday, with volume above average. The key support level now is $137.33, if that one goes then the 200 days moving average, standing at $135.01, will probably be the next stop.

The market couldn't breach the $141.69 resistance level, so the move that started with that big and ugly (for the bulls) red candlestick is still pretty much in play.

I'll continue holding SDS long, the inverse of the SPY with two times leverage.

[David Randolph]

The SPY broke down below the key $137.33 support level but snapped back in a violent way with extremely high volume, almost as high as the one we had on the big red candle.

I now have a 0.33% profit and don't feel all that bearish anymore, a bear market doesn't start this way, with many, many people feeling negative about economic prospects. Over the two bear market beginnings I've been through, nobody, and I mean nobody had an explanation to why stocks were going down. Everything was perfect, yet stocks kept going down.

This isn't the case this time. I've seen polls showing 40% of people being negative about the market. I see the put/call ratio at 1.66, even yesterday it rose 14% as the market went up (this means the ratio between put volume and call volume is 1.66 - stockcharts.com symbol is $CPC).

One of the issues that started the current sell off was the Chinese stock market one day plunge. I immediately thought there could be a crash there, as those things often happen in emerging markets. But no, looking at the Shangai Stock Exchange chart I see the bull market there is still young. Moreover there's no macroeconomic reason for the market to go down, there's still plenty of space for economic expansion because consumption accounts for just 35% of the Chinese GDP.

Sure, US consumption is slowing down, perhaps it will even enter a recession, but that seems priced in at this point, you know how the market is always looking 6 to 12 months ahead.

I'm not sure if we're still in a long term bull market or not, I feel the market will be trading sideways for some months.

I know I've said I would only close the SDS long whenever the SPY closes above $141.69, but I feel that will indeed happen so I have no reason to lose money. I never change the trading plan on an intraday basis but I can change it when the market is closed, and the SPY chart below is not one that I want to be short of.

The trading plan is:

Sell SDS.

[stout7735]

It is time to take an updated look at SDS and QID...