Tuesday, November 22, 2011

-3x Contra ETF Index Status

My daily blog can be found at http://www.effectivevolume.com, specifically in the GGT forum.


It's been a while since I've posted in this thread -- we simply have not had what I would consider a good setup with the contra -3x Bears. Hence, allow me to refresh you on the methodology.

I prefer to use 3x leveraged ETFs because the leverage tends to increase the impact of slope analysis. Put another way, compared to 1x ETFs, 3x ETFs will show trends faster to the eye (and to analysis packages), simply because of the multiplier of the leverage.

This increased visibility can work against you. The increased volatility of using these instruments to form an index one way or another can be gut-wrenching, but when you observe the index regularly, you'll learn the subtle indications and you can play accordingly.

I'm using a template that I adapted from Dr. Jeff Scott with the High Growth Stock visualization system. The template provides a standardized way to review a multitude of equities quickly, and I have found the software to be quite useful.

Across the top is a ribbon indicator called the "Bongo" Weekly. Derived from 3 different Wilder RSI calculations and a moving average, you can see that it is telling us that it is safe to consider contra ETFs at this time. I find this to be a confirming indicator, not a leading indicator, so by the time this transitions we may have missed the initial entry buy point. In this particular case I think we're only late by a few days -- more on this below.

Below the Bongo Weekly ribbon are two Bull/Bear Power indicators. These are Dr. Alexander Elder constructs, and the Bull Power indicator uses the 13d EMA and the highs of the bars to determine where in the cycle we are presently. As you can see in the popup window, Bull Power = 2.5024, and this is quite bullish for contra ETFs.

Bear Power uses the lows of the bar as well as the 13d EMA. When bear power goes positive, the lows are above the 13d EMA, and this too is a show of momentum to the upside. As you can see, we now have a Bear Power = 1.7312, so the combination of Bull/Bear Power suggests considerable strength for contra ETFs.

Under Bull/Bear Power I have two different ribbons, but both are focused on the Force Index 13d EMA and MA calculation methods. Force Index is simply a multiplication of Price*Volume, and this too is a Dr. Elder construct. When these ribbons are red, the 13d EMA/MAs of the Force Index are negative. When they are green -- wait for it -- they are positive, and this indicates that there is price and volume demand for the equity or index. In this case we've been positive for several days, indicating a general move to -3x contra ETFs.

Below this I have a 2d Force Index ribbon, and THE COLORS ARE REVERSED. Meaning, when the indicator is RED, we have a POSITIVE 2d FI. Why I do this is that I do not want to enter until the 2d moves GREEN, preventing me from buying too high within the cycle. This teaches me patience, and as we are seeing today with the futures being higher, we might actually get the 2d FI to move green with the day's action. Consequently, since we have a RED 2d FI, there will be no entry into a contra ETF today.

Below the 2d FI I have the standard MACD, but here I'm using 8-11-25 instead of 9-12-26, which are the standard settings with most default implementations of the MACD. On the positive side we are in the lower half of the window, so we're not too late. While the MACD histogram is positive (I like catching this when it crosses from negative to positive), it is quite difficult to get all the indicators to align when this occurs hence this becomes a secondary signal. The fact that the signal line and MACD are rising together, giving a strong, positive histogram is quite encouraging and tells us to seriously consider contra ETFs.

Below this is the Bollinger %B ribbon. Red here indicates that we are nearing the top of the range, and I typically like to see some pullback to a yellow or light green before I enter. Again, with futures being higher today, I suspect we will pull back nicely and this will give us assurance of entering contra ETFs soon.

Below the %B ribbon are the slopes of the 13d EMA and 34d EMAs on price. This is probably one of the more important graphs to review.

First, note how both are pointing upward. In my parlance, these have a positive "slope of the slope" and as you can see, these have been pointing upwards for several days. This is a great sign.

Next, note how both EMAs are now above the 0 line. Again, in my parlance, these are positive slopes, and this is quite bullish. The 34d just moved positive and now with both confirming, we have an opportunity to move long in contra ETFs. This graph suggests we may be late, as the present signal has been quite strong (note that 2d FI has been and continues to be positive, blocking us from chasing). I'd like to see a pullback here in the slopes, but have them remain positive, and then enter on continued strength.

The final large area is the pricing window and what is bullish about Monday's action is that the price bar for Monday was completely above the 8d, 13d, 21d, 34d, and 50d MAs. Only the 160d remains, and this will be a key test going forward. Nevertheless, you can see that the slopes are all pointing upward (with the exception of the 160, which is still pointing down, albeit slower), and upward trending slopes on an index is a good thing.

There are a number of ways to consider opportunities here, but the easiest is to use the ranking function within the HGSI package. Doing so reveals the following ranking of the ETFs which I have included in the index:

Some of these may be thinner than you prefer so ensure you check $-volume for your tolerance levels.

INDZ is a thin ETF and to some degree, it can be disregarded unless you are comfortable trading thin ETFs (I am, but others are not). In the case of a leveraged ETF thin = dangerous, so tread carefully.

EDZ is a liquid ETF that is worthy of consideration. I would wait for it to pull back on any market strength (ensuring that the 2d FI is negative on the day of consideration), then my entry point would be as it takes out the high of the previous day, plus a few cents. Here's the chart:

BRIS is a thin ETF and can be considered like INDZ above.

DPK is a somewhat liquid ETF trading ~100K shares per day average (or so). It too has a constructive chart:

Finally, to show that we're not too early to be considering these instruments, here is the composite index on all inversed ETFs (-1x, -2x, and -3x) with 21d MA volume > 100K shares:

The equivalent ranking view of these equities looks as you would expect. Good candidates are to be found near(er) the top:


As with all my discussions on equities, you are responsible for your own decisions and I am not. Please do your diligence, and please take ownership for your actions.